How master trusts are leading the charge on decarbonisation

Master trusts including Nest, NOW Pensions and The People’s Pension have all published their latest annual reports in line with the Task Force on Climate-related Financial Disclosures (TCFD), which are designed to track progress towards Paris-aligned sustainability goals.

The Pensions Regulator (TPR) requires pension schemes to confirm they are taking “proper account” of climate change, seriously considering risks and opportunities, and setting a goal.

Bobby Riddaway, a professional trustee and managing director of HS Trustees, says: “Master trusts are doing the right thing, the right way, and producing reports TPR will like. There are a lot of positives and they’re very detailed. The reports show they are taking it seriously.”

The three master trusts’ reports confirm they are on track to achieve net-zero emissions by 2050, with half or more achieved by 2030.

Carbon footprint improvements, measured per £1m invested, appear impressive. The greatest gains came from asset allocation, but each also emphasised the importance of stewardship.

Differing methods of calculation complicate comparison. “The important point is carbon intensity is going down,” says Andrew Cheseldine, a professional trustee at Capital Cranfield, speaking in a personal capacity. “Calculations are internally consistent so tracking schemes year-to-year is accurate, but comparing schemes is far less reliable.”

Master trusts all make progress

For Nest’s default strategy, the carbon footprint for scope 1 and 2 emissions fell by 18% to 40.7 tonnes of carbon dioxide emitted per £1m invested.

(Scope 1 emissions relate to a portfolio company’s direct carbon emissions, while scope 2 relates to indirect emissions from purchased energy. Scope 3 emissions are other indirect emissions from a company’s supply chain that it cannot directly control.)

Nest’s equity allocation’s footprint reduced by almost 10%, with Nest’s report noting the reductions “have mostly been driven by changes in the make-up of the portfolio”, although the pension provider has continued its engagement with energy companies and toughened up its climate voting guidelines.

Cheseldine says: “Nest, which has a lot of resources, provides a good benchmark and has certainly been pushing the boundaries for a long while. It has always been ahead of the game.”

The carbon footprint from NOW Pensions’ equity and credit investments – again covering scope 1 and 2 emissions – fell from 63.1 tonnes per £1m invested to 52 tonnes year on year. This was due to its “recent change in strategy, and the nature of our investments being less carbon intensive”, the master trust stated.

Assets with an explicit responsible investment objective made up 75.2% of NOW Pensions’ total assets and 76.3% of its default investment strategy. NOW Pensions aims to decarbonise through the “transformation of underlying activities… rather than divestment”, it said.

The People’s Pension default arrangement consists of its Global Investments (up to 85% shares) Fund and its Pre-Retirement Fund.

The carbon footprint of both funds reduced significantly: the Global Investments Fund’s footprint fell by 53% to 31.5 tonnes of carbon dioxide per £1m invested, while the Pre-Retirement Fund’s emissions dropped by 36% to 38.1 tonnes per £1m invested.

The report notes “exclusions and tilting” in developed equities are “responsible for most of the emissions reductions”, particularly from reducing its energy exposure. That said, it notes “stewardship is crucial” in high-impact sectors.

“I like that they’re all reducing emissions,” says Riddaway. “There are some very good moves forward, such as NOW Pensions delegating to Cardano and The People’s Pension making significant sustainable equity investment.

“I like that they are looking to potentially account for nature and biodiversity. They’re the big takeaways – but they’re all hidden within really detailed, long reports.”

From disclosure to impact

TCFD reports are designed to improve reporting of climate-related financial information; there is no requirement to decarbonise.

But while master trusts are making meaningful progress on decarbonisation, for some, there is more to be done.

“Where these reports fall down is their lack of discussion about allocating to proper impact investments,” says Riddaway.

He advocates moving beyond TCFD. “It has done its job – we realise climate change is serious and could decimate financial values,” he says.

“Disclosure has run out of road and we need to take the next step. We should widen it to include biodiversity and social issues and move on to transition action plans, getting money into impact investments.”

Cheseldine cautions there is a limit to how much can be achieved without distorting performance, degrading liquidity or increasing governance requirements.

“We need to be careful we don’t impose extra costs,” he says. “It’s all very well being ahead of the curve, but not if that means lower performance. The bottom line is we need to make sure members get value for money.”