Fund Solutions

Pension Funds’ Net Zero Plans “Not Yet Fit for Purpose”

Thinking Ahead Institute report highlights key sustainability themes for asset owners this decade.

Pension funds must put their net zero plans into action now, to meet 2030 decarbonisation targets on the way to carbon neutrality in 2050, according to Roger Urwin, Co-Founder of the Thinking Ahead Institute.

“It’s time for the investment industry to translate their net zero announcements into concrete strategies, with 2030 serving as an essential way point to net zero greenhouse gas (GHG) emissions,” said Urwin, speaking at a WTW and Thinking Ahead Institute webinar launching a new report on key trends for global pension assets.

“While pension funds so far have put in a lot of effort to produce these plans, they aren’t yet fit for purpose, aligned and ready to deliver on those 2025-30 commitments,” he noted.

The 22 largest pension markets manage US$56.58 trillion in assets, according to the report, indicating the potential impact if pension funds within these markets all commit to net zero and implement climate transition strategies.

Realising 2030 targets means pension funds need to facilitate a “rapid transformation of the investments landscape” at a scale “rarely experienced before”, the report said. This will require bolstered sustainability-focused in-house resources and transparency from asset managers on their engagement efforts, it added.

“Outsourcing is a viable option for budget constrained organisations. We expect third-party provider strategies to come under growing scrutiny. Emerging standards and better data have led to better reporting on engagement activities and have increased accountability in the industry,” the report said.

By taking greater accountability for their emissions, asset owners will more quickly and effectively “drive the climate transition across the investment value chain”, Urwin said.

However, a 2021 report by the Thinking Ahead Institute noted that only 14 of the world’s largest 100 asset owners had signed up to the Glasgow Financial Alliance for Net Zero (GFANZ) net zero target.

Speaking to ESG Investor last year, Urwin said the importance of large asset owners adopting net zero strategies went beyond the direct impact of their portfolio by influencing the strategies of smaller institutions.

Last year, another Thinking Ahead Institute report highlighted that asset owners are increasingly reviewing their governance models to manage the ESG-related risks and opportunities of their investments, ensuring their strategic asset allocations account for sustainability while maintaining strong financial returns for beneficiaries.

Understanding their fiduciary duty

Asset owners remain uncertain about the extent to which sustainability-related concerns fall into the scope of their fiduciary duty, said Luba Nikulina, Head of Global Research at WTW.

“Understanding what falls within the definition of fiduciary duty has continually emerged in our conversations with clients and pension funds,” she said. “Much more needs to be done to clarify the legal framework and equip those investing our pensions with the confidence to invest sustainably.”

It is expected that the interpretation and implementation of fiduciary duty will therefore undergo increased scrutiny over the course of this decade, said Nikulina.

Historically, fiduciary duty has centred around financial materiality and “largely precluded non-financial considerations”, the report said. However, as climate risk is increasingly recognised as a financial risk, the race to net zero will continue to stretch “the window of interpretation”, it noted.

Last year, the UN-convened Principles for Responsible Investment (PRI) and law firm Freshfields Bruckhaus Deringer reviewed the legal barriers to investing for sustainability impact. The report said that current laws allow for the pursuit of sustainability goals alongside an institutional investor’s other fiduciary duties to a “significant extent”.

However, without further clarification by policymakers, it will remain challenging for investors globally to identify when and how investing sustainably is allowed as part of their fiduciary duty, the report said.

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