Introduction

The UK has committed to reducing net carbon emissions to zero by 2050, yet numerous people are unaware that their pension schemes may be invested in high carbon-intensity businesses.

With private pensions exceeding £6 trillion in assets and accounting for 42% of the total wealth in the UK (ONS 2018 ), it seems highly probable that, without aligning pension scheme emission targets to those of the government, a successful path to net zero will be immensely challenging for the UK.

Regulation

To ensure pension funds are part of the journey to net zero, the DWP has made amendments to the Pension Schemes Bill requiring pension scheme trustees to consider and disclose their climate-related financial risk and opportunities fully in line with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD). From 1 October this year, the larger schemes and authorised master trusts will be required to comply.

UK emissions today

[Source: Climate Change Committee: Sixth Carbon Budget ]

Is the TCFD regulation enough?

There is no silver bullet to the climate change problem and compliance with the TCFD recommendations will not guarantee a successful transition to aggregated carbon net zero.

A significant challenge facing pension funds is how to measure the emissions of their portfolio, exacerbated by the fact that there is no gold standard metric dictated by the regulations. There does seem to be some common ground amongst managers and schemes with the use of weighted average carbon intensity (WACI) which measures tonnes of CO2 emissions for every $m in revenue.

MSCI reports the carbon footprint of its flagship global indexes

[Source: MSCI ]

Another challenge being faced is the setting of targets. Whilst the regulations require schemes to set emission reduction targets, these requirements are light on precise disclosure metrics. Furthermore, there are no clear consequences laid out should targets not be met by the scheme. There is a possibility that this will come at a later stage and schemes should prepare for this.

The path to reaching net zero in the UK

[Source: Committee on Climate Change Sixth Carbon Budget ]

The TCFD’s recommendations set out requirements for schemes to run scenarios against different global warming outcomes. This should provide trustees with a good idea of the risks faced by their fund should global warming increase beyond +1.5°C.

Passive investing

A large portion of pension funds are invested in passive index funds; while this may make emission-reporting easier for trustees, it does beg the question how much influence they can truly exert on individual companies to change their practices.

Individual member influence

Perhaps pension scheme members have more influence than they realise. In 2018, Mark McVeigh, an Australian pension fund member filed suit against the Retail Employees Superannuation Trust (REST) alleging that the fund violated the Corporations Act 2001 by failing to provide information related to climate change business risks and any plans to address those risks. In 2020, the parties reached a settlement where the fund agreed to incorporate climate change financial risks in its investments and implement a net-zero carbon footprint goal by 2050.

Conclusion

Given the size of the pensions industry in the UK, it will be very difficult for the government to achieve its 2050 net-zero target without strong cooperation and engagement with pension schemes. While the current TCFD recommendations and disclosures provide trustees with a better understanding of the risks associated with climate change, the regulation does not apply a clear set of emission metrics and does not enforce net-zero targets that come with clear consequences or penalties should trustees not achieve these targets.

Without a clearer regulatory framework around metrics, targets and financial consequences, it may fall on the consciences of trustees to do the right thing and for pension fund members to pressure their trustees to take a leadership position on achieving carbon net zero long before the deadline of 2050.

Dean Wetton Advisory UK Limited believes that the TCFD recommendations are an important step on the journey to carbon net zero. As a professional investment advisor to pension funds in the UK, we have teamed up with SustainValue, one of the UK’s leading sustainability management consultancies, to work with our clients as well as other pension schemes and asset owners, not only to produce their TCFD Reports, but also to work together to improve their business practices. For further information or a discussion on how we can assist you to meet the TCFD’s requirements and reporting obligations and move closer to carbon net-zero, please contact [email protected].