Majority of UK Pensions “Failing” on Climate

Call for mandatory UK net zero commitments as FTSE Russell report indicates European asset owners most focused on climate risk.

Almost three quarters of the UK’s largest pension schemes are failing to act decisively on climate by making robust net-zero greenhouse gas (GHG) emissions commitments ahead of COP26 next month.

This is according to analysis by Make My Money Matter (MMMM), a campaign aimed at ensuring the £2.8 trillion held in UK pension schemes is invested in line with net-zero targets and that members’ views on ESG are incorporated into investment strategies.

Despite increasing climate urgency and growing regulatory pressure, 71 of the largest 100 UK pension schemes have yet to make robust net-zero commitments, meaning that almost £2 trillion remains in funds not yet aligned with the Paris Agreement. Major schemes that have not yet made such commitments, according to MMMM, include the Universities Superannuation Fund, the Marks & Spencer Pension Scheme and the Lothian Pension Fund.

Progress has been made over the past year, MMMM acknowledged, with an estimated £800 billion of UK pension money now in schemes robustly tackling the climate crisis.

Last week, HSBC’s UK pension scheme announced its commitment to achieve net-zero by 2050 or sooner across its £36 billion defined benefit (DB) and defined contribution (DC) assets. Its plans include targeting a real economy emissions reduction interim target of 50% by 2030 or sooner for its equity and corporate bond mandates.

The West Midlands Pension Fund, which manages almost £19 billion on behalf of 343,000 members, also released a framework and strategy document, outlining its commitment to aligning with the goals of the Paris Agreement and net zero ambition by 2050 or sooner.

“The findings reveal that, despite big movements from major players, the industry still has a long way to go ahead of COP26 in Glasgow,” MMMM said.

In particular, DB pension schemes are lagging behind DC workplace pensions, with 15 leading DC workplace pension providers making credible emissions reduction pledges, MMMM added.

The campaign called on all pension schemes to commit to science-led net-zero targets. If pension schemes continue to not voluntarily commit to net-zero and mitigating climate risks, MMMM said the UK government should make net-zero commitments mandatory for all pension funds and the wider finance sector through legislation if necessary.

Separately, leading UK companies including FTSE-listed firms and financial institutions responsible for over £4.5 trillion in assets have written to the Chancellor and Secretary of State for the Department of Business, Energy and Industrial Strategy calling on the UK Government to make the disclosure of net-zero transition plans mandatory for large companies ahead of COP26.

Regulatory requirements

Pension funds are already required to report on their climate related risks, following Chancellor of the Exchequer Rishi Sunak’s announcement that the UK would introduce mandatory reporting aligned with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) by 2025.

From 1 October, the largest pension schemes with over £5 billion in AUM have been required to begin finalising their mandated TCFD-aligned reports. UK Pensions Minister Guy Opperman extended the original deadline by seven months from individual year-end dates, meaning reports do not need to be until 2022.

Passed in February, the Pension Schemes Act strengthens the powers of the Department for Work and Pensions (DWP) to manage and enforce climate-related reporting requirements. Failure to meet any climate-related reporting requirements in the UK will lead to enforcement action by The Pensions Regulator.

The Financial Conduct Authority (FCA) recently consulted on climate-related financial disclosures for asset managers, life insurers and FCA-regulated pension providers consistent with the TCFD’s recommendations.

MMMM’s analysis of the UK pensions sector covered the 100 largest UK pension schemes according to Professional Pensions, including the largest DB schemes, as well as the largest DC workplace pension providers offering master trusts and/or group personal pension plans, according to Corporate Advisor. The campaign group used direct engagement, public sources, media coverage and participation in industry-level initiatives to assess schemes’ net zero commitments.

Nigel Peaple, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association, said setting out net zero commitments is a complex process for pension schemes that required time and effort to ensure they are meaningful “and not merely ‘green washing’.”

He also noted that 2050 net zero commitments by mature DB schemes could be of “limited practical benefit” because the vast majority of their assets are in UK government bonds, which he said already have “green credentials”, adding that most DB scheme assets are transferred to an insurance ‘buy out’ provider before 2050.

Europe-centric focus on climate

European asset owners are more likely to consider climate risks within their portfolios and investment strategies, according to a separate report from FTSE Russell, the global index, data and analytics provider owned by the London Stock Exchange Group.

Based on a survey of almost 180 asset owner professionals, the report noted diverging opinions on the investment impact of climate risk around the world. Over half of asset owners in Europe said they were “very concerned”, compared to one third of US asset owners who said that they were “not concerned” or “not very concerned”.

In EMEA and Asia Pacific, the priority focus area for asset owners is climate and carbon, according to the survey, with over two-thirds focused on this area (77% and 68%, respectively). In North America, the focus is strongest on social themes (62%), followed by governance (58%) and climate/carbon (56%).

Nonetheless, broader sustainable investment strategies are now more common globally, FTSE Russell noted, with 84% of asset owners either implementing or evaluating sustainability within their portfolios.

“Sustainable investment is not a trend—it is now the market standard,” said Jaakko Kooroshy, Global Head of SI Research at FTSE Russell.

In EMEA, sustainable investment evaluation and adoption by asset owners is nearly universal (97%), up from the 85% in 2020 and 72% in 2018. The figures for North America also show an increase from 39% in 2018 to 68% in 2021.

“Not enough”

Ahead of COP26, UK pension funds need to prove their commitment to tackling climate change, said Richard Curtis, MMMM Co-Founder, noting that the current number of net-zero commitments is “not enough”.

“We have to act with urgency to make sure that the trillions in our pensions help tackle the climate crisis, not fuel the fire […] and that’s why we want the UK government to make net zero mandatory for all schemes at COP26,” he said. “That way, we can be confident that all pensions, while looking after our money, also work towards protecting our planet. After all, what’s the point in collecting a pension in a world on fire?”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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