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Campaign group Make My Money Matter is calling on the government to make net zero mandatory for pension schemes this November as it finds that 71 of 100 large pension funds have not made “robust net zero commitments” to date.
The group is calling on all schemes to commit to net zero ahead of the UN’s climate conference in Glasgow next month and wants to see net zero become mandatory for pension schemes. It has compiled a list of schemes it says have not yet committed to achieving net zero, and wants government to mandate doing so to progress the issue, "given that voluntary action is not working quickly enough".
What is the government’s position on mandating investments?
COP26 president Alok Sharma has previously urged pension funds to aim for net zero, and the Pension Schemes Act 2021 requires large pension schemes to report on their climate risk exposure from this month. However, the Act stopped short of mandating greener portfolios; when the word “revise” in respect of investments was used in a draft amendment during the law’s passage through parliament, it caused considerable industry debate and was later dropped.
Pension funds and their lobby groups maintain that in order to fulfil their legal duty to members, they must be able to take investment decisions free from government diktat. However, this view is increasingly coming under fire: a recent report by the Work and Pensions Committee recommended the government should consult on mandating alignment of DC default investments with UK climate policy.
Legally, the issue would face hurdles: the government previously fought and lost a court battle over forcing local authorities to invest in line with UK foreign policy, though it said at the time that it plans to return to the issue and deal with it through legislation.
Is too much pensions money still driving emissions?
Some – particularly local government schemes and very large funds and providers – have committed to reaching net zero before the UK’s aim of doing so by 2050, but “the majority of large UK pension schemes have failed to act on climate ahead of COP26”, says MMMM.
“While progress has been made over the past 12 months – with an estimated £800 billion worth of UK pension money now in schemes working to tackle the climate crisis – there is still almost £2 trillion in UK pension schemes that are driving the climate emergency, risking the health of the planet and the health of investor returns,” the group says.
Its research found that the majority of DB schemes are lagging behind their defined contribution cousins on climate, as almost all of the leading 15 DC providers have recently made credible emissions reduction pledges.
Filmmaker Richard Curtis, who co-founded MMMM, said: “This report highlights just how far we have to go. With almost three-quarters of leading pensions schemes not yet aligned with the goals of the Paris Agreement, we have to act with urgency to make sure that the trillions in our pensions help tackle the climate crisis, not fuel the fire. We need pensions to be proud of.”
Curtis said the new report shows that voluntary action alone is not enough, calling on the government to make net zero mandatory for pension funds.
"That way, we can be confident that all pensions, while looking after our money, also work towards protecting our planet. After all, what’s the point in collecting a pension in a world on fire?” he said.
PLSA points to practical issues
The Pensions and Lifetime Savings Association has welcomed the report by MMMM, saying that the legal requirements on pension funds in the UK "are world-leading" as they must report in line with the Task Force on Climate-related Financial Disclosures.
"The pensions sector wants the government to accelerate its climate roadmap to ensure companies, asset managers and service providers catch up with the expectations on pension schemes. Doing so will ensure that schemes have more accurate and meaningful data on which to base their strategies and commitments," said the association's director of policy and advocacy, Nigel Peaple.
“Making a pledge to a net zero target is a step that many schemes have taken and we expect many more will do so, especially once further work is undertaken across the sector to embed the frameworks the industry has developed and published in the last few months," he said, adding that schemes want to be sure their commitments are meaningful and not merely 'greenwashing'.
He also said while net zero is a clearly defined target, the route to achieving it for the UK and other countries was still far from clear.
"We hope that COP26 will be a catalyst to address this gap. It is also important to recognise that trustees’ fiduciary duty is to look after their members money in a way that is appropriate for the circumstances of the scheme they are in," Peaple noted.
Comparing DB with DC schemes was misleading, he continued. DC schemes have much longer time horizons and invest in equities; in contrast, for a DB scheme a net zero commitment by 2050 or sooner "would be of limited practical benefit to the environment" because the vast majority of their assets are in UK government bonds, "which in relative terms should already have the right 'green' credentials, and in any case the assets are likely to be transferred to an insurance buyout provider long before 2050", he argued.