Pension scheme trustees could consider combining net-zero investment strategies to avoid certain issues, industry experts have suggested, amid warnings that Scope 3 emissions could “blow decarbonisation targets out of the water” in the near future.

Speaking at the PLSA Investment Conference 2022, AXA Investment Managers (AXA IM) senior solutions strategist, Bruno Bamberger, noted that an increasing number of clients are basing their net-zero objectives on decarbonisation targets.

Bamberger highlighted the use of carbon emissions benchmarks as one potential strategy, explaining that asset owners can monitor this as part of their normal quarterly reporting and aggregate it across different asset classes to apply it at a total scheme level.

However, he clarified that this strategy uses Scope 1 and 2 emissions, warning that there are “Scope 3 emissions lurking around the corner”.

“Scope 3 emissions can be as much as 10x higher at portfolio level depending on the asset class, and that’s actually gonna blow these decarbonisation targets out of the water," he stated.

"So be prepared as a trustee to update your decarbonisation targets in the future when Scope 3 comes into play.”

In addition to this, Bamberger raised concerns over potential exclusions based on carbon emissions, noting that whilst utilities, for instance, are very heavily emitting, and could present a “very easy” way for portfolio managers to decarbonise, there are “really valuable reasons” to remain invested in the sector.

He explained: “The utility sector has a higher degree of science based targets, at about two thirds compared to the normal industry average of 1 third, so whilst they are high carbon emissions, they actually have a real credible way of achieving net zero and can help your portfolio and the wider world achieve net zero in practice, not to mention helping the financial objectives of your scheme as well”.

However, Bamberger suggested that pension schemes could consider using two complementary strategies to target net zero in tandem to overcome some of these issues.

In particular, he suggested increasing alignment with net zero, explaining that asset owners can do this by increasing alignment iteratively using the Institutional Investors Group on Climate Change (IIGCC) categories and the framework they give for it.

He emphasised that, unlike decarbonisation targets, this approach is sector agnostic, meaning that investors will not see large skews away from high emitting sectors, and can actually shepard companies and their portfolio towards net zero.

Bamberger also emphasised that this approach would take account of Scope 3 emissions, and may not need to be revisited on an regular basis as more data becomes available, as decarbonisation targets might.

Whilst Bamberger acknowledged that this approach is “not that easy”, he said he has “no doubt that by using consultants and getting data from asset managers this can be achieved”.

“No matter what your scheme size or type is, or your strategic allocation or where you are on your sustainable investment journey, there are credible pathways for you to achieve your outcomes while having a positive impact on people and the planet,” he concluded.

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