The vast majority of smaller defined benefit schemes rely on their consultant as a main resource for climate issues, yet less than two-thirds of consultants offer climate advice, new research by mallowstreet has found. Other findings show that interim targets are the exception more than the rule, and data scepticism continues. 

 

The mallowstreet Climate Risk Report, covering 78 DB schemes and consultants, shows that that 84% of schemes with assets below £500m use their consultant as a main resource for climate issues, but only 64% of consultants provide advice to help schemes with the climate transition, despite 73% having a net zero commitment. 

 

 

 

The finding that only two-thirds of consultants provide advice came as a surprise to some in the industry, who cited the importance of climate advice. Amanda Latham, policy and strategy lead at consultancy Barnett Waddingham, said there is a need for increasing capability and competence across the financial sector and all other industries when it comes to climate change, “as this is an emerging risk presenting plenty of uncertainty – we can’t look to past performance to tell us what might happen". 

 

She highlighted the climate competency framework 2021, developed by the Investment Consultants Sustainability Working Group, which “sets out deliberately stretching standards that we think help schemes know what to look for and what to ask their consultants to demonstrate”. 

 

The Pensions Regulator references the ICSWG’s climate competency framework in its guidance on provider competency, observed Cadi Thomas, head of ESG research at consulting firm Isio. 

 

Thomas admitted that consultants are still in the process of upskilling, and that “it’s important that trustees pick the consultant with the right skillset”. She noted that schemes can also integrate climate objectives into the strategic objectives they are required to set for their investment consultant since the Competition and Market Authority’s 2019 order. 

 

 

Just over half (53%) of large schemes have set a net zero target, the mallowstreet Climate Risk Report also found. Some large schemes have recently announced their intention to set such targets, including the BBC Pension Trust and the M&S Pension Scheme.  

 

   

However, targets are often in the distant future, or coincide with the UK’s own 2050 timeline, which some in the industry say equates to doing nothing. Despite long time horizons being no exception, the use of interim targets, which could help measure progress, appears to be somewhat patchy. Only a fifth (21%) of schemes with at least £5bn in assets plan to reach an intermediate emissions reduction goal of up to 50%, and 32% of them plan to reach this target by 2030. Half of those with a net zero commitment are still considering setting an interim target. 

 

    

     

Large schemes have been subject to new laws on climate change since last October; while this does not compel them to strive for net zero, trustees must set at least one target for the scheme in relation to at least one of the metrics they use.  

 

The target can be percentage-based or absolute, a fixed point or measured relative to a benchmark, and there are rules on the time horizon. The Department for Work and Pensions’ statutory guidance states that a “long-term target with no interim targets would not on its own meet our expectation for trustees to consider and appropriately manage climate-related risk”, specifying that the trustees’ target “should not be more than 10 years into the future”. Where trustees set a target more than 10 years away without any interim goals, they should explain the reason for doing so, in their publicly available climate report. 

 

Setting a long-term net zero target without translating this into a decarbonisation pathway makes it very difficult to determine if a scheme is on track to meet its net zero target, noted Thomas. Interim targets not only give investment managers clear shorter term objectives but also provide trustees with an opportunity to engage with them should managers not be on track, she explained. 

 

Last year’s Glasgow Pact calls on nations to accelerate their interim decarbonisation goals to 2030, reducing emissions by 45% compared with 2010. “Wherever possible we believe schemes should align with this to ensure global momentum,” Thomas said, naming the Science Based Targets initiative and the Net Zero Asset Owner Alliance as tools that can help trustees with this. 

 

Latham said interim targets are important to track progress but pointed to the developing nature of climate science and what is needed in relation to target setting.   

 

“The sponsors of virtually all pension schemes recognise sustainability has financial consequences, and we are also seeing trustees recognise this. Whilst smaller schemes may be taking steps to reduce their emissions, many are waiting to see what trends emerge on target setting from larger schemes before making their own commitments,” she said. 

 

What are your thoughts about these findings? For more information, you can download a free copy of the mallowstreet Climate Risk Report here.