Baseline date: Portfolio holdings as of 30 September 2021, FY 2019 emissions data.

Baseline performance:

• Corporate bonds (internally managed): 190 tCO2e/£million revenue
• Fixed income investment benchmark: 246 tCO2e/£million revenue
• Global Equity (internally managed): 92 tCO2e/£million revenue
• Global Equity investment benchmark: 200 tCO2e/£million revenue

Target year(s): 2030

Target(s): Corporate bonds (internally managed): A target of 50% reduction of the annual WACI “carbon budget” by 2030 starting at the 2019 WACI of the Bloomberg Barclays benchmark.

Listed equity (internally managed): A target of 50% reduction of the WACI “carbon budget” by 2030 starting at 25% below the 2019 WACI of the FTSE All World benchmark.

GHG scopes included: Scope 1 and 2 emissions across all reported asset classes. Tenant use of properties (a scope 3 emissions category) is included in the emissions of properties.

Asset classes in scope: Internally managed listed equity and corporate bonds.

Methodology/ net zero scenarios: The Trustee has set a portfolio level alignment target in line with the NZIF methodology, and asset class level targets for emissions intensity reduction, covering those asset classes that are feasible at this stage. A number of factors have influenced the choice of targets:

• The Scheme is currently expected to undergo significant changes in asset allocation over the coming decade. The change in asset allocation will change the emissions of the portfolio without the effect being related to real-world emissions.
• The Trustee therefore considers that the most appropriate Scheme-wide target is an asset level alignment target. Emissions reduction targets have been set for individual asset classes rather than setting a Scheme-wide emissions reduction target.

The Trustee has set emissions reduction targets for internally managed assets in Fixed Income and Equities. For externally managed assets, Tesco Pension Investment Limited (“TPI”) continues to engage with managers, on behalf of the Trustee, to encourage them to set targets of their own which align with Net Zero and are appropriate to the manager. The majority of the public market exposure is internally managed (see climate report).

For the public markets portfolios’ emissions reduction targets, the proposed method is to set an annual carbon “budget” that the portfolios aim to stay within, using the weighted average carbon intensity (WACI) as the metric.

Corporate bonds: Starting point at 2019 WACI of the benchmark, reducing by 50% by 2030 (see baseline field).

Listed Equity: Due to the Scheme’s portfolio having a low baseline of emissions, the starting point of the budget will be set at 75% of benchmark emissions, to make the target suitably ambitious. A 50% reduction by 2030 is then applied. The equity portfolio’s starting point is significantly lower than the investment benchmark. Therefore, the equity portfolio will aim for a more ambitious target.

The targets will be reviewed every three years, although re-baselining the target is currently expected to happen if any of the following occur:

• Substantial changes to data coverage, availability, or quality;
• Significant shift in the fund’s sectoral or industry exposure; and
• New money or portfolio growth, requiring attribution for targets (not applicable for emissions intensity targets).

Emissions metrics: The Trustee will disclose three emissions metrics annually in its TCFD disclosure; absolute emissions, carbon footprint and WACI.

Absolute emissions and carbon footprint are being disclosed for internally and externally managed listed equity, corporate bonds and property where available and reasonably complete (without the disproportionate time or cost being incurred by the Scheme).
WACI is being disclosed for internally and externally managed listed equity and corporate bonds.

Sovereign-specific WACI metrics are being disclosed for sovereign bonds.

For direct and externally managed (indirect) property, emissions per m2 is being disclosed.

Approach: The Scheme’s principal investment manager, TPI, considers (on behalf of the Trustee) climate opportunities as well as risks when making new investments. The Trustee has multiple investments in climate solutions and the ability to provide a climate solution is considered as a positive when TPI makes a new investment on behalf of the Trustee.

The focus in the first year of setting targets has been on collecting climate data and setting alignment, engagement and emissions reduction targets. Climate solutions is on the 2022-23 agenda for research and discussion.

In Q1 2023, the Trustee will also be undertaking training from its advisors on climate solutions.

Baseline date: Portfolio holdings as at 30 September 2021, using 2019 emissions data

Baseline performance:

• 33% aligning or aligned
• 25% committed to align

During the year, the Trustee considered an assessment of the Scheme’s current position against the above target, based on the portfolio as of 31 December 2021, with target setting data from January 2022. TPI has estimated that 34% of the assets within scope for the target are classified as ‘aligning or better’. In addition to this, a further 28% have taken steps towards this status.

Target year: 2030

Target: 70% of assets under management of the “in-scope” asset classes meeting at least “aligning” criteria (see below).

Asset classes in scope: Internally and externally managed corporate bonds, listed equity and property. Information will also be collected for the sovereign bond exposure.

In addition, the Trustee collects data for whether external managers in private market investments (property and non-property) have made net zero commitments and whether the fund that the Trustee is invested in is within scope of the commitment. TPI (on behalf of the Trustee) will continue to monitor and engage with managers on this topic even though it is currently not included in the alignment target.

Data sources: The Trustee and TPI use the five levels of alignment from the IIGCC Net Zero Investment Framework to assess the level of alignment. The climate report (see link below) includes the interpretation of how the levels apply across asset classes.

To collect data, the following sources were used:

• Listed equity & corporate bonds: SBTi and data from ISS
• Property: CRREM
• External managers: questionnaires and interviews with managers

Target: A target of 70% of the financed emissions of the portfolio (asset classes within scope) under engagement or aligned with net zero in 2022/23.