DC providers urged to act faster on climate change
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The UK’s top 20 defined contribution pension providers are failing to keep pace with action required on climate change, campaigners at Make My Money Matter have said, and are calling on them to make five commitments to accelerate action.
Filmmaker Richard Curtis, who co-founded MMMM, said words are no longer enough. “Since 2020 pension providers have committed £1.3tn to net zero, and this is important progress; but now the time has come for them to move beyond targets and take real action for real world impact."
By moving from commitments to real action, the pensions industry can maintain the momentum generated over the past 12 months, he argued and warned: “There is no point inheriting a pension in a world on fire.”
MMMM chief executive Tony Burdon said he hopes a new report by the campaigners will be a wake-up call for the pensions industry, as he lambasted “the absence of clear, coordinated and consistent climate action to date”.
The group has surveyed 20 workplace pension providers in the lead-up to COP27, the UN climate summit taking place in Egypt this week, to assess their progress on climate action; all bar two responded. Aviva and Legal & General came top based on the group’s five criteria, scoring positively on four of them.
The campaigners are now calling on all UK pension schemes to:
set short-term 2025 emissions reduction targets;
commit to eliminating deforestation from their portfolios;
set clear climate voting policies that expect companies to align with temperature goals;
set policies to end fossil fuel expansion; and
“turbocharge” investment into climate solutions.
Few providers have deforestation target
In its report, the group said more than half (60%) of providers have not published a 2025 emissions reduction target. Several providers have targets to halve emissions by 2030, rather than 2025.
Just four of the top 20 providers – Aviva, Fidelity, Legal & General and LifeSight – have made commitments to eliminate deforestation from their portfolios, the survey found.
Tropical forest loss currently accounts for 8% of the world’s annual carbon dioxide emissions, according to US thinktank the World Resources Institute, saying if tropical deforestation were a country, it would be the third-biggest emitter globally after China and the US. MMMM, which has been vocal about deforestation since 2020, said schemes cannot adequately act on climate without addressing their portfolios’ exposure to the practice.
The group also claimed that just 10 providers have explicit climate voting policies which expect companies to align with global temperature goals, and that no scheme has a policy to end fossil fuel expansion such as new oil and gas exploration. However, the report cited examples of strong voting policies by Aviva, Nest, Royal London and Scottish Widows.
Sixty per cent of the top 20 providers have plans to increase their investments into climate solutions, according to MMMM, but the campaigners argue that these are not yet at the level of ambition needed to significantly scale up industries such as renewable energy and green infrastructure.
DC providers pledge to do more
Defined contribution schemes are on the whole supportive of the campaigners’ aim to raise the bar on climate investing but are at different stages of setting and implementing targets.
At Now Pensions, trustee chair Joanne Segars welcomed the report, pointing to the fund’s commitment to halve emissions by 2030 and reach net zero by 2050. The master trust has been investing in sustainable assets for five years and ended its direct commodity exposure to fossil fuels, she noted.
Segars said Now is planning to build on its existing efforts: “We will be adding to our sustainable investments over the next 12 months and will continue to undertake stewardship on sustainability by engaging with companies that we invest in and running focus groups with employers and savers.”
Others are also planning to do more. Leanne Clements, head of responsible investing at B&CE, said master trust the People’s Pension is committed to aligning its portfolio to the Intergovernmental Panel on Climate Change objective of keeping global warming below 1.5 degrees.
“Given the complexities involved in developing a robust net zero strategy, we want to establish clear and achievable milestones before we share the roadmap to achieving our objective. We will be updating our climate change policy in 2023, which will provide further, clear detail on how we will deliver our commitments,” she added.
Others are on the way to reaching some of their targets. Jo Sharples, chief investment officer DC solutions at Aon UK, said having a policy in place was not enough to drive action.
“We are very proud of the actions we have taken, including the progress we have made on carbon emissions,” she said, including a reduction of 48% by end 2021 since 2019 in the passive default strategy, and 61% emissions reduction for the active default strategy on scope 1 and scope 2 emissions. The master trust aims to halve emissions by 2030.
Several of the companies reviewed by MMMM have worked with the campaign group, including Willis Towers Watson’s master trust LifeSight.
“We are pleased to see that LifeSight has been included as a more progressive scheme driving focused change,” said Jelena Croad, head of LifeSight UK.
She pointed to the master trust’s recent statement about tackling deforestation and its support for the Race to Zero Financial Sector Commitment on Eliminating Agricultural Commodity-Driven Deforestation by 2025, among others.
Ben Pollard, founder and chief executive of master trust Cushon, said his firm would continue to work with MMMM. “With the average UK pension pot financing 23 tonnes of CO2e emissions each year - equivalent to nine family cars - the environmental impact of pensions is the elephant in the room of climate change,” he argued.
Cushon claims to have the world’s first net zero pension. “We are very proud that the Cushon sustainable investment strategy is the first of its kind, delivering 100% impact across the portfolio with an equity index focused on companies that align to the UN Sustainable Development Goals,” explained Pollard, adding that this includes helping to prevent deforestation, where Cushon was rated negatively by MMMM.
Another scheme to have worked with MMMM is Smart Pension, which scored well on three of MMMM’s five questions. Its head of investment proposition, James Lawrence, said the master trust has placed emphasis on sustainability for several years and has set itself “challenging targets which we believe will make a real impact”, such as net zero by 2040 on the default growth fund, and halving emissions by 2025.
Alongside other initiatives to promote climate investing, Lawrence said the emissions of the fund have already been cut by over 40% since 2019, and it is now entirely invested in assets rated Article 8 or higher by the EU’s Sustainable Finance Disclosure Regulation.
Picture is also mixed among insurers
Zelda Bentham, group head of sustainability at Aviva, which came joint first with L&G, said the provider is pleased the MMMM report recognises its progress on net zero delivery, strong voting policies and leadership in eliminating deforestation from its portfolios.
“We also know there is more for the pensions industry as a whole to do and we will continue to work on improving our policies and investments as part of our wider net zero 2040 ambition,” Bentham said.
Aviva wants to see a requirement for financial institutions to develop and share climate transition plans.
At provider Scottish Widows, Maria Nazarova-Doyle, who heads up responsible investments, welcomed the MMMM report.
“We believe it’s particularly important to focus on actions that stimulate positive change in the real world, like active stewardship with a strong voting policy aligned to 1.5 degrees outcome and investing in climate solutions,” Nazarova-Doyle said.
While she found it encouraging that many pension funds have set top level net zero commitments, she said that “it’s critically important we move on to details of implementation, and fast”.
Hilkka Komulainen, head of responsible investment at Aegon UK, which is one of several providers that scored negatively on MMMM’s five criteria, thanked the campaigners for raising ambition and providing accountability on climate action across the industry.
“It’s clear that there is room for improvement: we see industry collaboration to be essential in driving forward real world action,” she said, adding that the firm has ramped up its efforts on climate. “Since the research was carried out, we’ve been actively building out our approach across these areas and have already made substantial progress. We’re looking forward to publishing our net zero transition plan next year and to our continued collaboration with Make My Money Matter.”
Make My Money Matter analysed data from the following DC providers: