The battle against climate change is one of the biggest fights currently faced by society. With an estimated $3.8 trillion invested in UK pension assets[1] in 2021, the pensions industry has a critical role to play in the battle against climate change. According to a report by Make My Money Matter[2], the UK pensions industry enables more CO2 than all UK carbon emissions. Pension schemes are estimated to invest £112 billion into fossil fuels and the industry would need to reforest over 50 percent of the UK’s entire landmass to offset its emissions.

Policy mandated by government places certain requirements on pension schemes to move forward the transition to a low-carbon economy and help the UK to meet its climate change targets. In addition to policy mandated by government, there are also other opportunities for the pensions industry to beef up their action to make a real difference and fully contribute to limiting global warning.

Invest in sustainable companies

Pension funds can choose to invest in companies that are working to reduce their carbon footprint and transition to a clean energy economy. This could include companies that are developing renewable energy technologies, improving energy efficiency or reducing forestation. This could also include companies that are working to reduce their environmental impact in other ways such as by reducing waste. By investing in these companies, pension funds can help to accelerate the transition to a low-carbon economy with the ultimate goal of  net-zero.

Regulations require trustees to report certain climate metrics and to set targets but, to date, the government has steered away from imposing mandatory net-zero targets on pension schemes and the Climate Change Governance Regulations do not require trustees to set them or any other mandatory targets to reduce portfolio emissions. That said, a number of bigger schemes have chosen to adopt a net-zero target for their investments (an approach which has been commended by TPR in its Climate Change Strategy) and this is increasingly an area which trustees are keen to explore.[3]

Many within the pensions industry believe that a net-zero target of 2050 is a pragmatic approach to meeting the Paris Agreement goals – such a target exceeds governmental requirements to consider ESG factors in investment decision-making and is arguably a political or reputational decision as well as an investment one. Ongoing debate will continue amongst fiduciaries as to whether meeting net-zero targets is completely aligned with maximising members’ long-term returns.[4]

Of those that have already set a net-zero target of 2050, some aim to accelerate this target as they gain more experience of climate-related issues and the implications of implementing a net-zero portfolio before that date. Such targets are not legally binding and shouldn’t conflict with their fiduciary duties or investment policies.

Disinvest from fossil fuels or exclude them

Disinvesting from companies involved in the extraction and production of fossil fuels (oil, gas and coal) is another action pension funds can take. This process is also called divestment and is the opposite process to investment. It reduces the funds available to these companies and sends a clear signal to those companies that their business model is no longer sustainable, putting pressure on them to invest in renewable energy.

Pension funds can also prohibit certain investments being made in an attempt to tackle climate change, such as exclusion of those involved in the fossil fuel industry.

In September 2016 the London Borough of Waltham Forest became the first local authority in the UK to commit to fully divesting its pension funds away from fossil fuels and by September 2022 had done so. Divesting is publicly popular too: polling for NEST in 2020 found that 65 percent of pension savers believed their pension should be invested in a way that reduces the impact of climate change. Just four percent strongly disagreed (Collinson and Ambrose, 2020)[5].

In August 2020 NEST, the largest UK pension fund with nine million members, began divesting from fossil fuels[6]. The scheme pledged to move NEST members’ money away from any company involved in thermal coal, oil sands or arctic exploration and drilling by 2025, unless they have a clear plan to phase out any related activity by 2030. They also committed to becoming a net-zero investor by 2050.[7] It was hesitant about describing its new policy as a full divestment programme and said it remained interested in oil companies that were transitioning from carbon-based fuels to green energy and renewable technology.

Engage with companies

The government has said that its policies are designed to encourage stewardship rather than divestment and that “measures are not intended to give any support to campaign groups calling for blanket divestment from certain assets. Government continues to believe this would be the wrong approach – engagement with high carbon companies, when done effectively, can reduce the climate risk to which the scheme is exposed. At the same time, stewarding these firms to set a plan for the transition can have a greater impact on climate change than simply selling assets to others who might not hold investee firms to account.”[8]

Pension funds can use their influence to engage with companies they invest in to encourage them to act on climate change issues. This could include asking companies to set ambitious reduction targets, invest in renewable energy or disclose their climate-related risks.

Following this route would involve pension funds holding on to their investments in fossil fuel companies on the basis that doing so would give them greater ability to influence those companies and drive real change in the climate change crisis by doing so.

Support climate change research and policies

Supporting climate change research undertaken by universities, think tanks and other organisations is another way the pensions industry can help to tackle climate change.

In addition, they can use their political influence to support policies that will help to address climate change and advocate for climate action at the government level. This includes supporting policies that put a price on carbon, invest in clean energy and help communities adapt to the impacts of climate change.

Educating members about climate change

The pensions industry can educate scheme members about the risks and opportunities of climate change. This will help members to make informed decisions about how to invest their money in a way that aligns with their values and enables them to demand action from their pension providers.

Providing members with investment options that allow for carbon-neutral choices

Providing members with investment options that include funds offering carbon-neutral choices will enable members to invest their pension contributions in a way that helps to tackle climate change.

The above gives an overview of steps the pensions industry can take, in addition to government policy, that will play a significant role in the fight against climate change and help to power the UK’s transition to a green economy.