Analysis by the Pensions Regulator (TPR) has found that more than 60% of climate reports by pension schemes had some form of net zero goal with a target date of 2050 or earlier.

Schemes with more than £1bn in assets under management have been required to publish climate reports since 2022. TPR has analysed a selection of 30 reports and published its findings last week to help raise standards across industry.

More than 60% of TPR’s sample had some form of net zero goal with a target date of 2050 or earlier. While there is no requirement for trustees to set a net zero target, TPR said such targets can be consistent with sensible risk management.

Mark Hill, climate and sustainability lead at TPR, said: “Climate change disclosures should be the product of good risk management. That’s why we want schemes to know what ‘good’ looks like and improve their management of climate-related risks and opportunities.

“Even if not yet in scope for disclosures, schemes should act now and read this report to help them in their strategic decision-making.”

The review found examples of trustee action on climate risk including updating defined contribution (DC) default lifestyle strategies to include sustainable funds, increasing allocation to low carbon tracker funds or companies with “high levels of green revenue”.

The regulator also noted how schemes are now exploring opportunities such as forestry, green bonds or committing funds to private market renewables and encouraging fund managers to engage with top carbon dioxide emitters.

Establishing best practice

TPR said trustees should consider many factors when preparing reports. This includes adding context early in the report by providing information on scheme size, structure of defined benefit (DB) sections and DC popular default funds.

It said that, where reports referred to specific investment mandates, it was important to explain their size in relation to total scheme assets to help readers understand an issue’s materiality.

Karen Shackleton, director at Pensions for Purpose, said the findings from TPR’s research are encouraging.

However, she added that Pensions for Purpose surveyed asset owners in February 2023 and many replied that they were not yet using their reports to inform and drive strategy. Some suggested that they needed more data to be able to meaningfully drive change.

Shackleton said that TPR’s review suggested that progress was being made.

She added: “I would argue that the relationship between risk management, climate disclosures and climate action is circular. Good risk management will help trustees improve climate disclosures which will feed into progress on climate action, but as the climate journey progresses increased knowledge and understanding will, in turn, allow trustees to finetune their risk management processes, improve the quality of their disclosures and subsequently make even more informed climate action decisions.

“I was pleased to see materiality of climate risks being mentioned in the TPR report. This is important because an analysis of materiality can result in surprising data for trustees. It allows them to focus their resources on areas that are likely to have the biggest impact, from a climate perspective. Without that analysis, the temptation might be to focus on the largest investments by size but these may not be where the greatest portfolio climate risks lie.”

Room for improvement

TPR said it had observed some good practice on scenario analysis but also areas of concerns. Future reports could be improved by considering a qualitative analysis based on clear narratives, the regulator said.

It added that trustees should provide commentary on the challenges and limitations of the scenario analysis they have undertaken, as well as taking into account the challenges and limitations of their analysis when drawing conclusions about their scheme’s exposure to risks.

TPR suggested that trustees could discuss the latest market developments with their advisers and whether any developments mean it is appropriate to revisit the scenario analysis.

In a recent report from asset manager Ninety One, sustainability director Daisy Streatfield argued that there was a lack of consensus among asset owners globally about how to build net-zero aligned portfolios that maximise real-world impact while preserving return targets.

Streatfield said 53% of asset owners expected it to get more difficult to achieve emissions reduction targets while delivering the best possible returns.

She added: “A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns. In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.”

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