Pension funds, with their large pools of patient capital, are a key (but underutilized) source of funding for the climate transition, including underpinning the UK’s commitment to net zero emissions by 2050.
However, recent debate around UK pension funds has focused on the use of their investments to boost the economy and their integration into growth through defined benefit and defined contribution arrangements. These aspects are also critical to combating the climate crisis.
CPI’s research sheds light on European pension funds’ progress in setting climate targets and taking action. While the UK is pleased that it is not one of the laggards in a data set of more than 340 schemes (representing $7.8 trillion in assets), it can also draw on lessons learned from other countries to move faster.
UK pension funds: middling performance
CPI's Net Zero Finance Tracker (NZFT) shows that the 96 UK pension funds it tracks have a mediocre performance in setting climate targets and implementing policies to achieve them. The legislative effort has spurred progress that puts the UK among the five European countries taking the most action, behind Sweden, Denmark, Norway and the Netherlands.
While progress has been driven by the UK's regulatory framework, including mandatory climate-related disclosures from 2021 for schemes over £5bn and 2022 for schemes over £1bn, some schemes may still view these requirements as compliant Activity.
How policy drives change
Recent regulations, including the mandatory disclosure roadmap, are prompting larger pension schemes to start addressing climate risks and opportunities. These require the establishment of appropriate governance, strategies, targets and indicators specifically related to climate. Inevitably, some schemes fully embrace the requirements, while others take a compliance-driven approach.
A review by the UK Pensions Regulator of the first 71 revelations in 2023 noted that 43 of them contained formal net zero targets. However, these goals are new and few programs have clear implementation plans.
While there is no legal requirement for trustees to set a net zero target, the Pensions Regulator stressed it was “appropriate steps”. one The second review, published this year, noted that of the 30 TCFD (Task Force on Climate-related Disclosure) reports reviewed, 19 contained some form of net zero target, with 13 of those setting formal targets.
The UK's regulatory measures have also been copied by other European countries. However, the challenge with climate-related financial disclosures is that they do not necessarily drive change, especially at the pace that asset owners such as pension plans need to have a meaningful impact on action to limit rising temperatures.
Make progress in areas that need improvement
A CPI survey of 342 European pension funds shows that while progress is being made, there are still clear areas for improvement. Many pension schemes, especially large funds, have set targets. But these can only support the net zero transition if backed by a clear, credible implementation strategy.
The number of European pension funds with climate investment targets has increased from none in 2019 to 35 in 2023, with approximately $2.2 trillion in assets under management or ownership, but only three have publicly disclosed such targets.
Meanwhile, 60 plans aim to phase out, exclude or divest some or all fossil fuel assets by 2023, marking a significant shift from two targets in 2019.
The number of programs with implementation actions has increased from 26 to 100, mainly in the areas of governance, participation and climate risk disclosure, investment data and emissions data.
Despite clear progress, there are still a large number of pension funds without any reported targets or actions.
The road ahead
Research shows that regulatory efforts are indeed driving pension fund responses, particularly in the Nordic countries, but also confirms some intuitive beliefs:
- Plans with clear goals tend to do better at implementation.
- Larger plans tend to be more comprehensive and proactive in addressing climate issues.
- Net Zero Alliance members tend to score higher than non-Net Zero Alliance members.
There are opportunities for superannuation funds to strengthen their net zero performance in the following key areas:
- Strengthen engagement with businesses on climate issues by clearly outlining voting guidance and escalation strategies for asset managers.
- Drive demand for net zero investment products and work with asset managers to improve the environmental performance of existing funds.
- Expand its influence beyond own assets by expanding due diligence and evaluation of asset managers (which indirectly affects most asset allocations that occur locally), including general investment philosophy, overall sustainability practices and other assets. manage.
In addition, regulators are encouraging stewardship by asset managers by forcing them to report on participation, which will be critical in driving pension scheme responsiveness. They can also encourage the adoption of rigorous metrics and force companies to adopt and disclose emissions and transition planning metrics to increase the availability of data needed for capital allocation.
