Net zero pledges are now one of the industry’s most pressing challenges and, while progress is being made, significant barriers remain, inhibiting many pension schemes from making environmental commitments.
In October 2021, the Make My Money Matter Campaign found that 71 per cent of the UK's largest pension schemes do not have credible plans for reaching net zero — this represents more than £2tn of the UK’s pensions market.
The leading reason, according to a Pensions Expert Twitter poll, is that schemes do not know where to start, with more than one in three respondents stating they lack the expertise to initiate a pledge.
Creating an action plan
It’s better to be good now than perfect later, so taking some initial steps towards decarbonising is important – leave the award-winning environmental programme to later years
Ben Stansfield, Gowling WLG
Ben Stansfield, partner and environmental law specialist at Gowling WLG, says it is vital for schemes to make the initial steps.
“It’s better to be good now than perfect later, so taking some initial steps towards decarbonising is important — leave the award-winning environmental programme to later years.”
Separating the “must do” from the “should do” and the “could do” is an important place to start, adds Stansfield.
Likewise, Tim Currell, partner and global head of insurance investment at Aon, acknowledges that setting a net zero target and then following through on that over the coming decades “is certainly not a trivial task”, but believes it can be broken down into manageable, bite-sized chunks.
“The first step is for the trustees to get some training, so they can understand what is involved and why it is so important,” he says.
“There is general market awareness of the importance of climate change and commitment to net zero, meaning that it is much easier now for the trustees to plan their path to net zero and make that commitment than it was a few years ago.
“However, it’s important that planning the path comes first. Making the pledge is the easy part, but achieving the goal over the coming decades is much harder,” Currell adds.
Stansfield suspects that discussions on net zero ambitions are commonplace within pension schemes, but they decide to not go public with their ambitions “until they have a good idea as to how they will achieve their aims” to mitigate the risks of greenwashing.
Meanwhile, Alistair Byrne, head of retirement strategy and UK institutional distribution at State Street Global Advisors, says that interest and expertise in net zero are heading in the right direction.
“There are challenges and work to do, but progress is being made. We have seen our larger clients invest substantial amounts in climate transition equity strategies and attention is beginning to turn to fixed income,” he says.
“An increasing number of climate transition funds and strategies are available for schemes to implement their initial steps to net zero. At the same time, trustees want more information on the carbon characteristics of their portfolios, to understand their starting point and to benchmark progress.
“We also see growing interest in the stewardship voting and engagement activities we conduct to encourage the climate/net zero transition of companies in the portfolio.”
Supporting the pensions industry
Introducing and executing net zero pledges is not something pension schemes can do independently — they are reliant on asset managers, environmental, social and governance data providers, and regulators to contribute towards the shared end-goal.
Chris Hulatt, co-founder of investment manager Octopus Group, says pension fund clients have indicated that guidance on adopting net zero practices is not robust enough.
Although it is “fairly straightforward” for pension funds to sign up to a 2050 net zero target, Hulatt believes that “deciding on practical steps to achieve these targets or challenging the status quo to adopt more ambitious pledges with a shorter time frame” is where the difficulty truly lies.
To overcome this barrier, he says investment managers must be “innovative and flexible” in order to help pension funds “find green solutions that fit within their sometimes restrictive asset allocation pots”.
The Pensions Regulator has recently provided one important piece of the puzzle — its guidance on climate governance and reporting. Yet it remains to be seen whether this will give trustees more direction and confidence.
Learning from experience
All the while, lessons can be taken from those that were eager to “evolve and learn”, says Ben Pollard, founder and chief executive of Cushon.
In 2021, Cushon launched what it calls the world’s first Net Zero Now pension, yet, based on his experience, Pollard says it is unsurprising that many other schemes lack the expertise to know where to start.
Is legislation helping trustees on their journey to net zero?
When it comes to making their schemes greener, trustees have a lot to get their heads around. But current climate-related legislation is helping to focus minds and offer a framework for meeting net zero targets.
One challenge Cushon faced at the outset was getting hold of data on financed emissions from its fund managers. This would allow the provider to know how many tonnes of CO2 were being emitted for every pound invested.
“Getting this data together is the basic first step to understanding what you’re dealing with, but is still much, much harder than it should be,” Pollard says.
“Things are improving — competitive forces and climate disclosure requirements are gradually taking effect — but it is still very patchy depending on which fund manager you talk to.”
While the direction of travel may be promising, the need to address these shortcomings is essential and may require trustees’ attention for some time to come.
