Governance Gets a Climate Upgrade
The Kingfisher Pension Scheme (the Scheme) has enhanced its governance framework to more deeply embed climate-related considerations. For the fiscal year ending March 31, 2025, the Trustee held specific training sessions and climate-related discussions at quarterly meetings, focusing on climate metrics and net-zero strategies. A high-level review of climate beliefs established in 2022 was conducted, with a full review anticipated for the next fiscal year. The Scheme’s climate governance policy was also reviewed, leading to the inclusion of the valuation sub-committee to consider climate risk in discussions related to the Defined Benefit (DB) section’s triennial valuation as of March 31, 2025. This update ensures climate risk is considered in long-term funding strategy discussions. (Source: Kingfisher Pension Scheme TCFD Report, page 4, 11)
Climate Beliefs Stand Firm, Deeper Dive Ahead
The Scheme’s climate beliefs, initially agreed upon in 2022, were reviewed at a high level during the December 2024 Trustee meeting and remain unchanged for the coming year. These beliefs, which assert climate change as a long-term financial risk and emphasize the integration of climate considerations into investment decisions and manager selection, will undergo a formal in-depth review in 2026. This review will commence with a climate-related investment beliefs survey, with results to be discussed and finalized at Trustee meetings during the 2025-2026 Scheme year. (Source: Kingfisher Pension Scheme TCFD Report, page 9)
DB Section’s De-risking Journey Continues, Climate Lens Applied
For the DB section, the Scheme’s strategic journey plan aims to reduce allocations to higher risk/return asset classes, such as equities and alternatives, over time. The goal is for the portfolio to consist entirely of matching assets by March 2030. As of March 31, 2025, the current strategy holds 7% in return-seeking assets and 93% in matching assets, with a target of 0% and 100% respectively. This strategy and the 2030 target date will be reviewed as part of the 2025 actuarial valuation discussions. The Scheme’s strong funding position and low-risk investment strategy are considered broadly resilient to climate risks, with a focus on ongoing risk management and stewardship. (Source: Kingfisher Pension Scheme TCFD Report, page 17)
DC Section’s Default Strategy: ESG-Tilted for Future Resilience
The Defined Contribution (DC) section’s default investment strategy, the Lifestyle Cash Target strategy, incorporates ESG-tilted funds. These funds, specifically the LGIM Future World Fund and LGIM Future World Multi-Asset Fund, aim to reduce exposure to companies involved in fossil fuel exploration and high CO2 emitters, while increasing exposure to companies mitigating climate change impacts. This approach is expected to lead to better overall fund performance compared to non-ESG equivalents, as investee companies are better positioned to withstand transition risks or benefit from new technologies. The default strategy is invested 100% in the Kingfisher Lifestyle Fund until 10 years before retirement, gradually de-risking into lower-risk assets. (Source: Kingfisher Pension Scheme TCFD Report, page 20-21)
Scenario Analysis Refreshed for 2025 Valuation
While the Scheme’s 2022 climate scenario analysis concluded resilience for both DB and DC sections, a full refresh of this analysis is planned for the 2025-2026 fiscal year. This aligns with the 2025 formal valuation and strategic reviews across DC and investment, allowing for updated considerations of climate-related risks. The previous analysis, based on the funding position as of March 31, 2022, indicated that the DB section’s funding and investment strategy was unlikely to be significantly impacted by the three climate scenarios explored. (Source: Kingfisher Pension Scheme TCFD Report, page 5, 24-26)
Investment Managers Under the Climate Microscope
The Scheme continues to monitor its investment managers’ approaches to climate-related risks and opportunities. For the fiscal year ending March 31, 2025, the Trustee engaged with key investment managers to understand their identified risks and opportunities within their specific asset classes. This engagement included discussions on data quality and specific climate-related risks identified for the Scheme’s asset holdings. Quarterly reports from investment consultants provide ESG ratings for managers, and the Scheme expects to update its climate risk dashboard based on the insights gained. (Source: Kingfisher Pension Scheme TCFD Report, page 6, 13, 32)
LDI Portfolio: Green Gilts Emerge as Climate Opportunity
Insight, managing over 37% of the Scheme’s assets in its LDI and ARB portfolio as of December 31, 2024, identified green gilts as a specific climate-related opportunity for an LDI mandate. These bonds are explicitly linked to the financing of green initiatives. Insight noted that ESG risks within UK LDI primarily relate to government bonds, with the impact on gilt values from climate change being less relevant than for other asset types, given the portfolio’s objective to track liability values. (Source: Kingfisher Pension Scheme TCFD Report, page 32)
Blackrock’s Absolute Return Bonds: Navigating Physical Risks with Green Bonds
Blackrock, managing approximately 5% of the Scheme’s assets in absolute return bond funds, indicated that the fund may face more exposure to physical risks, particularly linked to allocations in industrials and utilities. Blackrock highlighted that engaging in strategic investments, such as green bonds, can help navigate climate-related risks, with green bond proceeds dedicated to renewable energy generation and transmission. (Source: Kingfisher Pension Scheme TCFD Report, page 33)
PIMCO’s Multi-Asset Credit: Policy and Technology Drive Transition Risks
PIMCO, managing around 6% of the Scheme’s assets in its diversified income fund, identified policy and technology as key drivers of transition risks. They noted high risk from policy in the utilities sector as companies shift from coal to gas and renewable energy. Technology advancements, such as wind, solar, and battery cars, have helped these industries build momentum. PIMCO also highlighted that changing customer behavior presents both risks and opportunities. As of September 30, 2024, the GIS Diversified Income Fund held 1.62% in green bond holdings. (Source: Kingfisher Pension Scheme TCFD Report, page 33-34)
LGT Alternatives: Extreme Heat and Transition Costs Dominate Risk Landscape
LGT Capital Partners, managing approximately 4% of the Scheme’s assets in an alternatives portfolio, identified extreme heat as the most likely driver of financial losses across all sectors, including financials and healthcare. Their modeling also indicated that wildfires and floods pose significant risks. LGT concluded that transition risks are expected to have a greater financial impact than physical risks across their invested companies, suggesting that the cost of adapting to a low-carbon economy could outweigh direct climate-related costs. (Source: Kingfisher Pension Scheme TCFD Report, page 34)
Carbon Footprint Metric Shifts to EVIC for Consistency
For the fiscal year ending March 31, 2025, the Scheme decided to update the units of its carbon footprint metric to use tonnes CO2e per £m Enterprise Value Including Cash (EVIC) instead of per £m invested. This change was made because an increasing number of investment managers were already reporting using EVIC, and it provides a more standardized and comparable methodology across a wider range of asset classes. However, for assets like Insight’s LDI portfolio and Aviva’s buy-in, where EVIC is not quantifiable, the metric will continue to be reported as per £m invested. (Source: Kingfisher Pension Scheme TCFD Report, page 35)
Emissions Decline Across Most DB Assets
For the DB section, the Scheme observed a decrease in absolute Scope 1 and 2 greenhouse gas emissions across most asset classes for the fiscal year ending March 31, 2025, compared to previous years. Notably, Insight (LDI portfolio) and Aviva (buy-in provider) showed significant decreases, which is encouraging given their substantial proportion of the portfolio. The Scheme will continue to engage with managers where absolute emissions increase. (Source: Kingfisher Pension Scheme TCFD Report, page 39)
DC Section’s Emissions Trend Downward
For the DC section, the LGIM Future Equity Fund, which now comprises a higher proportion of the Scheme’s assets, and the Future World Multi Asset Fund both reported decreased Scope 1 and 2 emissions in 2024. The carbon footprint figures also showed a decrease across both funds. However, the ESG fund footprint for equities was noted to be higher than its non-ESG equivalent, prompting planned engagement with LGIM for clarification. (Source: Kingfisher Pension Scheme TCFD Report, page 44-45)
Data Quality Target Elevated for Scope 1, 2, and 3
For the fiscal year ending March 31, 2025, the Scheme updated its medium-term data coverage target to reflect progress made. The new target is to achieve or maintain excellent data coverage for Scope 1 and 2 information and reach at least an adequate level of Scope 3 data coverage across all funds (excluding Insight) by 2028. This represents an acceleration from the previous target of achieving excellent data quality across all holdings by 2027. The Scheme continues to engage with investment managers to encourage improvements in data quality. (Source: Kingfisher Pension Scheme TCFD Report, page 48)
LGT’s Data Quality Challenge and Industry Initiative
LGT’s data coverage for its alternatives fund decreased to an ‘adequate’ rating in 2024, down from ‘excellent’ in 2022. LGT attributed this to difficulties in collecting emissions data for private debt and equities. To address this, LGT has joined the ESG Data Convergence Initiative (EDCI) to standardize and improve ESG data quality in the private equity industry. This initiative has already led to an overall coverage of 30% for their private equity portfolio. LGT’s commitment to reaching Net Zero by 2050 or sooner across all assets under management, as part of the NZAM initiative, is also noted. (Source: Kingfisher Pension Scheme TCFD Report, page 50)
Blackrock’s Net Zero Commitment Under Review
Blackrock, managing the absolute return fund, withdrew from the Net Zero Asset Managers initiative (NZAMI) in January 2025. The Scheme plans to engage with Blackrock to understand their future plans regarding Net Zero commitments. (Source: Kingfisher Pension Scheme TCFD Report, page 51)
PIMCO and Hayfin: Net Zero Targets Pending Data Improvement
PIMCO (Multi-asset credit fund) and Hayfin (Direct lending) currently do not have explicit net-zero targets. PIMCO is open to working with clients on decarbonization goals, while Hayfin’s lack of a target is mainly linked to the difficulty in obtaining data for the private debt asset class. The Scheme will continue to engage with these managers on this topic. (Source: Kingfisher Pension Scheme TCFD Report, page 52)
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