DC pension schemes make ‘considerable progress’ to Net Zero

10 July 2024

The majority of defined contribution pension schemes have made considerable progress towards achieving Net Zero in recent years, as demand for sustainable investing continues to grow among UK consumers.

However, the ‘at retirement’ is lagging its counterparts, with many schemes yet to take action.

According to new analysis by Barnett Waddingham, 86% of the 22 default DC pension strategies reviewed have now set targets to reach net zero by 2050, with 18% of these targeting 2040.

The research showed that 15 investment solutions offered by leading pension schemes have targets in place to reach Net Zero by 2050, four have targets to reach it by 2040 and just three have no Net Zero target. Of the schemes that have set targets, 81% have also committed to achieving interim targets, which in many cases see the scheme aiming to achieve a 50% emissions reduction by 2030.

Barnet Waddingham said that the majority of providers are using index-tracking funds to incorporate sustainability, as well as investing in green bonds; investing in impact equities with specific biodiversity targets linked to the Sustainable Development Goals; and working to access opportunities that address both societal and environmental needs.

Since the firm’s initial sustainability analysis of the pension scheme market in 2021, it has seen a 23% increase in schemes’ investment in assets with climate targets during the growth phase.

In contrast, many schemes within the ‘at retirement’ phase are yet to take action. Barnett Waddingham said this is largely as a result of sustainability strategies focusing on equities markets rather than fixed income markets, with just a fifth of fixed income assets having built-in emissions targets.

Sonia Kataora, partner and head of DC investment at Barnett Waddingham, said: “With demand for sustainable investment showing no signs of slowing, it’s encouraging to see that schemes are listening and driving positive outcomes for members. Reaching the ‘holy grail’ of Net Zero will by no means be an easy feat for schemes, so the fact that the vast majority have committed to this target, but also set interim goals, are certainly signs that we are moving in the right direction.

“But there are different shades of green. While we’ve seen that most schemes tend to offer some level of climate-aware investing, others do not have interim targets, or leave fixed income out of their sustainability strategy altogether. This risks some members having greener schemes than others, possibly without their knowledge or choice. The world has evolved, and the market is well placed to be much more innovative in its approach to sustainability.”

To address the issue, Kataora said the market needs to carry out three key actions. Firstly, all providers must contribute to an industry push for transparency and offer in-depth reporting on their sustainability strategies. Secondly, they must be able to articulate which specific sustainability-related risks and opportunities they are trying to manage using the different building blocks in their portfolio. Lastly, Kataora said effective stewardship must be joined up across voting and engagement activities to maximise benefit.

“Only with this articulation and transparency, can we be sure that members understand how sustainability impacts their savings,” she added.

Professional Paraplanner