Larger pension schemes are storming ahead in the race to achieve Net Zero by 2050 compared to their smaller counterparts, says XPS Pensions Group.
A report published by the pensions specialist found 83% of £5 billion+ pension schemes have a Net Zero target by 2050. This compares to just 35% of £1 billion+ schemes.
In addition, nearly three quarters (73%) of the larger schemes had a clear plan to achieve their objective, versus 17% of smaller schemes.
The research showed progress is being made amongst schemes to manage climate risks, with most having made changes to their portfolio to include climate-aware objectives into their mandates and to finance climate solutions more directly.
Nearly two thirds (65%) of schemes with £5 billion+ have now introduced climate-aware funds and 61% are directly financing climate solutions. However, 44% of the cohort say they are not on track to meet the climate related targets they set in 2022.
XPS Pension Groups said there is “still room for improvement”, with more focus needed on transition alignments beyond carbon emission reduction where most of the current attention is. XPS calculated a weighted average of reported Implied Temperature Rise of 2.8 C, indicating schemes are holding assets which are misaligned with the climate transition.
In addition, shortcomings have been highlighted in relation to stress testing the financial impacts of physical risks in a high global warming scenario, the group said. As the Task Force on Climate-Related Financial Disclosures require schemes to undertake scenario analysis every three years, the research found that 56% of £5 billion+ schemes chose not to undertake the analysis this year and many of those who did said they did not find meaningful conclusions from the analysis.
In response to the findings of the report, XPS outlined four recommendations for scheme trustees, including engaging in ongoing training to understand the latest TCFD developments and speaking to pensions consultants on enhancing their climate strategy. In addition, trustees should assess the transition alignments across their portfolios and consider increasing the range of funds with embedded climate objectives, XPS said.
Alex Quant, head of ESG research at XPS Pensions Group, said: “TCFD has been pivotal in bringing climate change to the attention of pension scheme trustees. Many schemes have made good progress to address climate risks in their portfolios but the majority must place more focus on transition alignment in order to better contribute to real-world change.”
