Recently a client asked us about scope 3 carbon emissions from investments in pension schemes and whether this is something that is discussed amongst the social housing sector. Carbon emissions can be associated with the investment of pension schemes, so how significant are these emissions and should they be included in carbon reporting for social landlords? These were our thoughts:
Pensions are some of the world’s largest investments, with total private pensions wealth in Great Britain at £6.1 trillion in April 2016 – March 2018 [1]. Whilst these investments are meant to support individuals in elderly life, many are also hindering our future at the same time through investing in fossil fuels. By the time that many have access to these funds, climate change may have affected food prices due to increased severity of droughts lowering crop yields. Similarly, insurance prices may have increased due to the frequency of extreme weather events and sea level rise. A recent report found that the UK pensions industry enables more CO2 than the entire footprint of the UK, finding that £60 of every £1,000 invested in pension funds goes into fossil fuel companies including giants like Shell and BP [2].
How to report on Scope 3 emissions from pension investments
Accounting for emissions from investments is explained in the relevant technical guidance. This states that companies may account for emissions from other investments such as pension funds and retirement accounts as a Scope 3 emission. Investments are categorised as a downstream Scope 3 emission, because capital/finance is being provided for a service in the investment in pension funds [3].
The guidance states that during the term of the investment the companies can account for proportional (based on value of share) scope 1 and 2 emissions of relevant projects that occur in the reporting year in scope 3. For example, if you invested £0.5m in pension funds in the reporting year and this made up a total of £50m worth of investment within the pension provider, the scope 3 emissions would be 1% of the investee or project’s Scope 1 and 2 emissions.
If relevant, companies should also account for the scope 3 emissions of the investee or project, e.g. if a pension provider provides equity/debt financing to a window manufacturer the financial institution is required to account for the proportional scope 1 and 2 emissions from the window manufacturer. When scope 3 emissions are significant compared to other sources of emissions, investors should also account for the scope 3 emissions of the investee company.
How significant are these investments?
The Make My Money Matter report [4] analysed £1.9 trillion of the £2.7 trillion in assets under management in the UKs pensions. They found that 70% of leading pension schemes have failed to set robust net zero commitments building on an absence of data and poor transparency within the industry, despite growing public demand.
The MMMM report found that these pension schemes fund an estimated 330 million tonnes of carbon emissions every year, with £112 billion (6%) invested in fossil fuels. This results in estimated of 176.79 kg carbon emissions per pound invested in pension funds on average.
What can you do?
Putting pressure on pension providers and increasing the demand for sustainable investments will have a big impact, below are some suggested methods to increase the demand on ethical investments:
- Research and find out more about where your pension investments are going
- Switch to ethical investment funds with your providers
- Employers can demand more sustainable investments from their pension providers
If you want to find out more about how SHIFT can help with your sustainability reporting or for other enquires please get in touch here.
[1] Pension wealth in Great Britain – ONS
[2] New report finds pension funds enable more CO2 that the entire UK carbon footprint – Climate Action
[3] Corporate Value Chain (Scope 3) Standard – GHG Protocol
[4] R2 Report – Make My Money Matter