In the intricate tapestry of climate finance, pension funds emerge as colossal players, endowed with vast reserves of patient capital, yet often languishing in an underutilized state. These funds stand as pivotal allies in the race towards achieving the UK’s ambitious *net zero by 2050* goal.
Recent discussions surrounding UK pension funds have predominantly revolved around the economic stimuli their investments could furnish and the consolidation of Defined Benefit and Defined Contribution schemes to further these ends. Yet, these conversations are inextricably linked to the looming climate crisis, underscoring a dual responsibility.
According to enlightening insights from CPI, European pension funds are gradually awakening to the urgency of setting climate targets and taking actionable steps. While the UK boasts a commendable position, not categorized among the laggards of a dataset encapsulating over 340 schemes and a staggering USD 7.8 trillion in assets, there remains a wealth of knowledge to glean from others on this transformative journey.
UK PENSION FUNDS: A MIDLING PERFORMANCE
The CPI’s Net Zero Finance Tracker (NZFT) paints a picture of moderate progress among the 96 UK pension funds scrutinized for their climate target-setting and policy implementation. Legislative momentum has propelled the UK into the upper echelons of European performers, trailing only behind the likes of Sweden, Denmark, Norway, and the Netherlands.
While the UK’s regulatory milieu, marked by mandatory climate-related disclosures since 2021 for schemes with assets exceeding £5bn and systematically rolling out to those above £1bn by 2022, has catalyzed action, a concerning trend persists: some schemes navigate these requirements merely as compliance checklists.
HOW POLICY IS DRIVING CHANGE
The recent regulatory landscape, notably the roadmap mandating disclosures, has nudged larger pension schemes to confront climate risks and seize opportunities. It has necessitated the establishment of robust governance frameworks, strategic planning, explicit targets, and relevant metrics centered on climate variables. Some have enthusiastically embraced these requirements, while others have taken a more perfunctory approach.
A review by the UK Pensions Regulator of the inaugural 71 disclosures in 2023 revealed an encouraging development: 43 included formal net-zero targets. However, these targets were nascent, and few schemes delineated clear pathways for implementation.
Importantly, although there exists no legal imperfection compelling trustees to establish net-zero targets, the Pensions Regulator has characterized this as an “appropriate step.” A second review this year indicated that 19 out of the 30 TCFD (Taskforce for Climate-Related Disclosures) reports reviewed encompassed some variety of net-zero objective, with 13 firmly setting a target.
This regulatory momentum in the UK mirrors movements across the European continent. Yet, a significant challenge endures: climate-related financial disclosures, while critical, do not automatically catalyze the swiftness of change urgently needed for pension schemes to effectuate a substantive impact in the battle against temperature rise.
PROGRESS WITH AREAS FOR IMPROVEMENT
CPI’s examination of 342 European pension funds attests to progress, yet it unmistakably reveals areas ripe for augmentation. Numerous pension schemes, particularly the more substantial funds, have established targets. However, these aspirations will only transition into tangible net-zero outcomes when underpinned by concrete and credible implementation tactics.
The count of tracked European pension funds with climate investment targets has witnessed a meteoric rise from none in 2019 to 35 in 2023, collectively representing approximately USD 2.2 trillion in assets under management. Nonetheless, a mere trifling of these publicly disclose such goals.
Moreover, in 2023, 60 schemes had set their sights on phasing out, excluding, or divesting from fossil fuels—a striking escalation from just two schemes in 2019.
In terms of actionable implementation, the number has surged from 26 to 100, with initiatives primarily focusing on governance, engagement, and the disclosure of climate risks, investment data, and emissions statistics.
Yet, it is crucial to recognize that despite this upward trajectory, a significant portion of pension funds remains devoid of any declared targets or remedial actions.
THE WAY AHEAD
Research highlights that regulatory efforts are indeed spurring pension fund responsiveness, especially in Nordic nations, while reaffirming some long-held beliefs:
- Funds with robust targets tend to excel in their implementation efforts.
- Larger schemes are more likely to adopt a comprehensive and proactive stance toward climate issues.
- Members of net-zero coalitions generally achieve higher performance metrics than those outside these groups.
Opportunities abound for pension funds eager to enhance their net-zero performance in several pivotal arenas:
- Augmenting climate engagement with corporations by delineating explicit voting guidelines and escalation protocols for asset managers.
- Pursuing the demand for net-zero investment products and collaborating with asset managers to elevate the environmental standards of existing funds.
- Extending their influence beyond owned assets by conducting thorough due diligence on asset managers, ensuring that their overall investment philosophies and sustainability practices align with broader climate objectives.
Moreover, regulatory bodies will play an instrumental role in accelerating pension schemes’ responses, advocating for enhanced stewardship by mandating comprehensive engagement reporting from asset managers. They can also instigate the adoption of rigorous metrics and compulsory reporting on emissions and transition plans by corporations, thereby expanding the data landscape essential for informed capital allocation.
