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Is the pension market ready for net zero?
28th May 2024
A net zero commitment involves integrating climate change into the core of portfolio management. As pension schemes and asset managers transition from setting net zero targets to achieving them, they face greater complexity and must allocate more resources to meet these goals. In this article, Matt Hutchinson, Rowleys Head of Pensions and Partner, explores more about how the pressure to be net zero is impacting the pension market.
Recent trends suggest that pension schemes are beginning to embrace climate change’s significance. A global survey by Mercer, which included 200 organisations managing a combined $30 trillion, found that 35% of these entities had a net zero target—an eight-percentage point increase from the previous year. However, these targets have varying scopes: some asset managers apply them to over 50% of their assets, while many only include a smaller portion. This inconsistency reflects the different levels of commitment to net zero across the UK pension market.
Net zero considerations for pension schemes
To align with net zero, pension schemes must focus on effective stewardship. This involves understanding the climate impact of portfolio companies and the steps they’re taking to address it. Engaging with these companies is crucial, requiring robust stewardship programs and ongoing efforts to guide them towards sustainable practices.
Data transparency and climate-related disclosures play a key role in assessing a portfolio’s alignment with net zero. New standards like the International Sustainability Standards Board (ISSB) are expected to improve reporting and data quality, enabling better climate change assessments.
However, moving towards net zero also presents significant challenges. Stewardship has historically been underappreciated, particularly in schemes heavily reliant on passive equities. Regulatory and statutory reporting requirements can also divert attention from stewardship. As these reporting demands are relatively new, their burden is expected to ease over time, allowing more focus on engagement.
For pension schemes, understanding companies’ transition plans—detailing their strategies to decarbonise—is critical. Even companies with higher emissions can offer greater long-term impact if they have credible transition plans, emphasising that stewardship requires a nuanced approach
Resource allocation is another key consideration. There’s growing concern about whether pension schemes have enough resources for effective governance and climate-focused asset management. Given that climate change is a systemic risk with significant financial implications, schemes must move beyond low-cost metrics when choosing asset managers. Instead, they should look for those with the resources to address these challenges effectively.
As net zero commitments become more widespread, pension schemes must find asset managers who align with their goals and values. This is particularly important due to varying approaches to climate change, especially between UK and US-based managers. Finding managers who share the same commitment to sustainability is crucial for long-term success.
Overall, the UK pension market is on a journey to place climate change at the forefront of portfolio management. While progress is evident, much remains to be done to ensure that net zero targets translate into meaningful, real-world change.
The Rowleys pensions team are pension audit experts. We work with a large number of pension schemes, taking a balanced, risk-based approach to audit. If you’d like to discuss your pension scheme accounts and audit requirements, then please get in touch.