Over four-fifths or 83% of pension schemes with more than £5bn in assets under management (AUM) have implemented targets to reach net zero by 2050, according to research from XPS Pensions Group.
The consultancy analysed the Taskforce on Climate-related Financial Disclosures (TCFD) reports of 35 pension schemes who hold a combined £344bn assets under management. It found that overall 73% had put in place a plan to reach their net-zero objectives.
By contrast, only 35% with more than £1bn in AUM had set a target to reach net zero by 2050, while just 17% had developed a plan to accomplish this goal.
XPS said that progress is being made among schemes to manage climate risk as most included climate-aware objectives into their mandates and to finance climate solutions more directly.
However, it noted that there’s “room for improvement” with more focus needed on transition alignment beyond carbon emissions reduction where most of the attention is currently.
XPS calculated that UK pension schemes have a weighted average of reported Implied Temperature Rise of 2.8°C. By contrast, as part of the Paris Agreement, UK has committed to limit the temperature rise to 1.5°C.
The report also highlighted shortcomings in relation to stress testing the financial impacts of physical risks in a high global warming scenario.
As TCFD requires schemes to undertake scenario analysis every three years, the research found that 56% of £5bn plus schemes chose not to undertake analysis this year. Many said they did not find meaningful conclusions from the analysis.
The report had four recommendations to improve the situation. These ranged from engaging in ongoing training to understand the latest TCFD developments to speaking to pension consultants on enhancing their climate strategy.
The advise also involved assessing the transition alignments across their portfolios and considering the increasing range of funds with embedded climate objectives.
“TCFD has been pivotal in bringing climate change to the attention of pension scheme trustees,” said Alex Quant, head of ESG research at XPS.
He added, ” that many schemes have made good progress to address climate risks in their portfolios, but the majority must place more focus on transition alignment in order to better contribute to real world change.”
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