The vast majority of larger pension schemes have set at net zero by 2050 target — but only a third of smaller schemes have made such commitments.
These findings were in a new report form XPS Pensions Group, which reviewed the Task Force on Climate-Related Financial Disclosures (TCFD) reports of 35 pension schemes which are now obliged to reveal this information.
It found that 83 per cent of schemes with £5bn plus of assets now had net zero targets. This compared to just 35 per cent of those with £1bn of assets under management.
XPS said that 73 per cent of £5bn+ schemes had a clear plan to achieve their net zero objectives, compared to only 17 per cent of the £1bn+ group.
In the group of larger pension schemes, 67 per cent of them have introduced climate-aware funds, and 61 per cent are directly financing climate solutions. However progress is proving difficult for many, with 44 per cent of schemes in this cohort saying they are not on track to meet the climate-related targets they set in 2022.
TCFD disclosures became mandatory for schemes with over £5bn from 2021 and for schemes with over £1bn of assets in 2022. Schemes with less than £1bn are not required to publish TCFD reports.
XPS said in its view this regime has been instrumental in bringing climate change to the attention of pension scheme trustees and is the first step to successfully managing climate risks.
However it said there is still room for improvement, with more focus needed on transition alignment beyond carbon emissions reduction, where most of the attention is currently.
XPS calculated a weighted average of reported ‘Implied Temperature Rise’ of 2.8°C, indicating schemes are holding assets which are misaligned with the climate transition. Furthermore, shortcomings have been highlighted in relation to stress testing the financial impacts of physical risks in a high global warming scenario.
Additionally, as TCFD requires schemes to undertake scenario analysis every 3 years, the research found that 56 per cent of £5bn+ schemes chose not to undertake analysis this year, and many of those who did undertake scenario modelling indicated that they did not find meaningful conclusions from the analysis.
The report concluded with four recommendations for scheme trustees including engaging in ongoing training to understand the latest TCFD developments, speaking to pensions consultants on enhancing their climate strategy, assessing the transition alignments across their portfolios and considering the increasing range of funds with embedded climate objectives.
XPS Pensions Group head of ESG research Alex Quant says: “TCFD has been pivotal in bringing climate change to the attention of pension scheme trustees. 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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