New research shows pension schemes are waiving their climate change duties, despite new regulations.

ShareAction has analysed 16 of the largest UK pension schemes, managing over £34 billion for over 16 million people, on their approach to climate change. The review reveals that 14 – all apart from Nest and TPT Retirement Solutions – are not directly engaging with large global companies on their role in the climate crisis.

Pension funds were required from 1 October 2019 to publish policies on how they specifically incorporate climate change and other environmental, social, and governance issues in their investments. But ShareAction finds the vast majority are falling short.

Looking at these policies, ShareAction puts only Nest, the government-backed pension scheme with 8.5 million members, in the leading category. Nest actively engages its asset managers on its voting policy, and is transparent about talks with companies and the outcomes. Furthermore, it is reducing its exposure to fossil fuel stocks and increasing investment in companies which will benefit from the low-carbon transition. TPT, scoring in the category below, also provides evidence of direct climate engagement through the Climate Action 100+ initiative.

By contrast, the majority of the large pension funds (called master trusts) are delegating responsibility for voting their shares and climate engagement activity to their asset managers. This is concerning because regulations require schemes to have their own policy on so-called stewardship activities, including voting and engagement. Without direction from asset owners, asset managers are free to vote without a mandate.

ShareAction ranks schemes into four categories: leading; implementing; building, and learning. NOW: Pensions scored in the ‘learning’ category. This scheme had a simple policy on ESG and showed limited action on responsible investment. A further eight schemes scored in the ‘building’ category showing some signs of embedding ESG into their investments but limited action on climate change.

Nest, TPT and the People’s Pension are the only schemes who go into depth on climate change in their ESG policies, pointing to the need for robust engagement with companies in their portfolio to reduce their carbon emissions.

Lauren Peacock, Campaigns Manager at ShareAction and author of the report, says: “Millions of savers are putting their life savings into the hands of pension funds who are playing a dangerous game with it. By passing the buck on climate change, they give little comfort that the world and their savings will be protected come retirement. Younger savers are beginning to connect the dots between their personal finances and their impact on the planet. We hope these master trusts sit up and listen to these findings before it’s too late.”

Rachel Neill, Head of Sustainable Investment at Smart Pension, says: “ShareAction’s report demonstrates the progress that’s been made in the master trust space on ESG and stewardship and is also clear on where more can be done. Millions of savers have their retirement outcomes in the hands of trustees and as these assets continue to grow, responsible investment, stewardship and the impact that investment decisions are having, will continue to be central to trustees’ fiduciary duty. Being able to show how a scheme’s investment activity reflects things like the climate emergency helps to give members reassurance on the decisions that are being made on their behalf. As the report notes, bolder, smarter thinking is required to address some of the world’s toughest challenges. Continuously learning, evolving and exploring new ways of having a positive impact on these challenges is going to help to create a world we all want to retire in.”

Paul McBridge, Head of Risk & Governance at Atlas, says: “ShareAction should be congratulated that their persuasive lobbying has contributed significantly to the situation today whereby trustees and other fiduciaries have a legal obligation to consider the ESG attributes of their investment strategies rather than coalesce behind an anachronistic tenet of trust law. This will hopefully herald a behavioural step change. The collective weight of the UK’s long-term savings can be a powerful weapon in persuading companies across the globe that only sustainable products and responsible behaviours will be rewarded by investors. It’s an opportunity we can’t afford to miss.”

Other findings include:

• Low-scoring master trusts are over-reliant on other market players (their sponsoring group/asset manager/investment consultant) for direction on responsible investment issues
• Master trusts show low levels of engagement with policy-makerson the low-carbon transition.
• There has been an increase in take up of ESG/climate funds into master trusts’ default asset allocation.
• High scoring master trusts show signs of acknowledging the impact of investments on society and the environment.

With assets doubling since 2010 and the trend set to continue, master trusts are significant players in the pensions industry with the resource and influence required to give their climate policies real meaning. Master trusts which are well-governed are therefore a key mechanism through which the financial services sector can mitigate its negative impact on society and the environment.

It is important for pension funds to take a strong approach to engaging with the world’s most carbon-intensive companies, which will not only mitigate the most severe impacts of climate change, but also ensure that companies and portfolios are commercially resilient to the associated risks. The Principles for Responsible Investment estimates that up to $2.3tn, or 4.5 per cent, could be wiped off the value of global stock markets due to climate change.

The world’s leading climate scientists have warned there are only 10 years for global warming to be kept to a maximum of 1.5C, beyond which even half a degree will significantly worsen the risks of financially damaging droughts, floods, extreme heat and disruption for millions of people.

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Notes for editors:

• For more information, please contact Beau O’Sullivan at beau.osullivan@shareaction.orgor +44203 475 7859
• The master trusts in this review are the largest in the industry based on their assets under management (AUM)
• Master trusts are trust based pension schemes, which operate for multiple employers.
• The main source of information for this review was the largest 16 master trusts’ new environmental, social, governance policies contained in their Statement of Investment Principles (SIPs) made compulsory by new investment regulations. The regulations require pension schemes to publicly disclose their policy on ESG and specifically climate change.
• A full list of schemes reviewed: Fidelity Master Trust; Legal & General WorkSaveMaster Trust; Aegon Master Trust (formerly the BlackRock Master Trust); Scottish Widows Master Trust (formerly the Zurich Master Trust); Standard Life Defined Contribution Master Trust (Standard Life), Aviva Master Trust (formerly the Friends Life Master Trust); LifeSight (Willis Towers Watson); Mercer Master Trust; Aon MasterTrust; Atlas Master Trust (Capita Employee Benefits); Nest; The People's Pension (B&CE); Smart Pension; SEI Master Trust; NOW: Pensions; TPT Retirement Solutions