Sixty per cent of a group of large pension funds across North America, Europe and Australasia believe they will fail to achieve their net zero goals under current conditions, new research has revealed.
This pessimistic outlook — disclosed by Create-Research, which surveyed 50 large funds that collectively manage €3.3tn (£2.9tn) in assets — comes despite more than half of those surveyed having either already embedded or are in the process of incorporating net zero strategies into their portfolios.
The findings will also give active managers pause for thought. More than half of the respondents see passive investments as permanent features in their climate portfolios.
Sixteen per cent of respondents have fully embedded climate change objectives into their investment portfolios, the research found.
It is clear that the pensions sector is still in the foothills of net zero action
Amin Rajan, Create-Research
Meanwhile, 42 per cent of funds are currently implementing strategies, while 22 per cent are “close to decision-making”, and a fifth of funds are “at the awareness-raising stage”.
Just 28 per cent of funds have interim targets for their net zero strategies, with 30 per cent not setting interim goals, and 42 per cent saying that these would not be applicable.
In May, LCP confirmed that six of the UK’s eight bulk annuity insurers had set interim goals for achieving their own net zero targets.
“Although many pension funds are being highly proactive when it comes to climate change, it is clear that the pensions sector is still in the foothills of net zero action,” said Amin Rajan, chief executive of Create-Research.
Mixed perspective on performance
The coronavirus pandemic triggered a collapse in equities in March 2020 that subsequently rebounded.
Create-Research revealed a lack of consensus over the impact of this market dislocation on schemes’ climate investment performance.
Thirty-two per cent of funds said their climate investments had performed better than the rest of their portfolio since the initial market rout.
Meanwhile, 28 per cent said that it was too soon to say, with 26 per cent responding that their investments had performed at the same levels.
Furthermore, 14 per cent of funds said their climate investing had performed worse since March 2020.
The survey revealed a widespread adoption of stewardship that targets decarbonisation as part of schemes’ investment in climate change, with 80 per cent of funds using stewardship in this way.
Just over half (52 per cent) of funds omit carbon polluters, while 18 per cent conduct impact investing as part of their climate change investment strategies.
Many members expect responsible investment
It seems the key driver that is pushing funds towards their net zero targets is the desire to reduce climate change-associated investment risk in their portfolios, with two-thirds of funds seeking to cut investment risk.
Fifty-eight per cent of funds are looking for investment opportunities linked with the transition to net zero, while 52 per cent are trying to comply with national regulations.
Meanwhile, 40 per cent of funds are responding to pressure from their members, and 36 per cent of funds are trying to minimise their reputational risk.
There is demand from members for investment strategies that factor in environmental, social and governance factors, according to one pensions head.
Tesco: 9 in 10 members seek trust and safety in an ESG strategy
Members want a responsible investment strategy to deliver growth, but they also want to have trust in their scheme and ensure their savings are safe, according to research on Tesco’s defined contribution scheme members.
Tesco’s head of group pensions Amy de Baat revealed at LCP’s DC and Financial Wellbeing conference on May 10 that 90 per cent of members think it is important that a responsible investment strategy can grow their pensions as much as possible.
Engagement with Tesco’s members revealed that the future of the planet was most important to its membership aged between 18 and 34, she said.
Tesco set a net zero target to aim for its investments to be net zero by no later than 2050, which de Baat added is “very much aligned to what colleagues are telling us in terms of their objectives to protect the planet”.
