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UK Pension Providers Failing on Climate

Research demonstrates a lack of focus on the detail required for a truly robust climate strategy. 

The vast majority of UK pension providers lack robust and ambitious climate strategies, according to new research. 

The report, published by campaign group Make My Money Matter (MMMM) and sustainability research provider Profundo, assessed and ranked the climate strategies of the UK’s 20 largest defined contribution (DC) pension providers, which collectively manage £500 billion (US$629 billion) in assets and have more than 15 million active members. 

Eighty-five percent of the 20 firms that were assessed were found to have either “inadequate” or “poor” climate strategies. 

“We are disappointed and concerned by the state of climate action from leading UK pension providers shown by this report,” said Huw Davies, Senior Finance Adviser at MMMM. “We have seen green shoots of progress from the pensions industry in recent years, with dozens of pension providers making net zero commitments. But on the deeper levels of detail, progress has been too slow and the majority are failing to deliver ambitious climate policies that reflect the reality of the emergency we’re in.” 

The report assessed the pension providers across seven core indicators: commitment to a 1.5°C temperature pathway; measurement and disclosure of carbon footprint; detailed target-setting; investments in climate solutions; fossil fuel phase-out; deforestation and land use; and portfolio stewardship instruments. 

Although the majority have publicly set net zero targets, the ranking showed significant failings in their climate plans. Just three of the 20 – Aviva, Legal & General and Nest – were deemed to have “adequate” plans in place, with scores of 5.4, 5.3 and 5.1 out of ten respectively. 

“While there are positive aspects to what the top three [firms] are doing on climate, they are still at the lower end of ‘adequate’,” Davies pointed out. 

Thirteen of the providers, including Royal London and Standard Life, were found to have “inadequate” plans. The four worst-performing pension providers were Mercer, Hargreaves Lansdown, The People’s Pension and SEI – with the latter having scored just 0.5 out of ten. The average overall score for all the assessed pension providers was 3.2. 

Last year, UK Chancellor Jeremy Hunt announced the Mansion House Reforms to boost pensions and increase investment in British businesses, which included a commitment by DC pension schemes to invest 5% of their assets in unlisted equities. Experts have said this could boost allocations to green and impact investments. 

Underwhelming results 

The pension funds’ performance across the seven sub-indicators included in the report was also inconsistent. On policies related to coal and oil and gas, eight out of the 20 pension providers scored zero out of ten. Most pension providers were also found to have “limited” policies concerning investments in fossil fuel producers. 

The report noted that although total carbon emissions from UK pensions represent 330 million tonnes every year, £88 billion from UK pensions is invested in fossil fuels – the equivalent of £3,000 per pension holder. 

In addition, all of the 20 providers had “poor” or “inadequate” plans on deforestation and land use. Though over half have made a public commitment to tackle deforestation, very few have set comprehensive policies to align with it. In another report, MMMM estimated that more than £300 billion was invested by UK pension providers in companies with exposure to deforestation and nature degradation. 

In 2022, MMMM, Global Canopy and SYSTEMIQ published guidance for UK pension funds outlining how they could integrate a deforestation-free policy into their investment and stewardship strategies. 

Glimmers of hope 

UK pension providers scored highest on commitments to 1.5°C, measurement and disclosure, stewardship instruments, and their approach to investments in climate solutions.  

Almost half of the assessed pension providers have published a climate solutions investment strategy, the report read. However, definitions of a credible climate solution were either “fluid or lacking”, with providers having failed to demonstrate clear targets and benchmarks for progress.  

In November 2023, MMMM and pensions, savings and insurance provider Phoenix Group published a joint report highlighting seven strategies to bolster UK pension capital flows into climate solutions. Now, the MMMM-Profundo paper outlines a series of recommendations for UK pension providers to improve their personal scores over the next 12 months.  

These include developing detailed emissions reduction targets for key sectors and asset classes that cover emissions throughout the value chains of investee companies. Other recommendations include phasing out fossil fuel assets, acting on comprehensive deforestation policies, scaling up investments in climate solutions, and bolstering stewardship efforts. 

MMMM reached out to all 20 pension providers throughout the research process, with 18 responding to engagement efforts. “That, at least, is a good indicator of the sector’s willingness to engage [on climate],” said Davies, adding that he hoped the report would play a role in driving a “race to the top” within the pensions industry on best practice climate action.  

“There is around £3 trillion in UK pensions,” he continued. “That can either significantly contribute to the climate transition, or it can slow efforts down. Savers want to know that pension providers are taking climate risks seriously to protect people, planet and profits.” 

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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