Net-zero pension funds – an update on climate change and pensions investments

We recently wrote in our previous blog that there have been a number of recent developments in relation to climate-related investment by pension schemes, and that this is a key area to watch.

This week has proved no exception as several UK pension providers have announced plans to offer pensions with a carbon footprint of net zero.

Perhaps the most radical of these is Cushon, a UK-based fintech company, which has announced it will be establishing a new pension scheme in early 2021 that will be carbon neutral from the date of launch. The scheme will initially be open to pension savers via employers, but net-zero pensions will also be offered to direct investors later this year. 

This is a very significant new offering in the pensions market, as it will allow those pension savers who are most concerned with climate change issues to begin investing their pension funds with a view to sustainable investment immediately, rather than waiting for their pension scheme to adapt its existing investment portfolio.

Cushon’s offering of an immediately net-zero scheme stands out next to other providers that have announced commitments to reach net zero on their pension funds by 2050 – albeit those commitments remain significant and demonstrate a noticeable shift in the pensions market towards sustainable investment. 

Also this week, Aegon has announced targets of reaching net zero by 2050 for its auto-enrolment default pension funds, and halving its carbon emissions for its default funds by 2030. Similarly, the National Grid UK Pension Scheme has announced plans to achieve a carbon net zero asset portfolio by 2050 at the latest.

These announcements chime with some of the developments we noted in our previous blog post: 

• the commitment by the trustee of REST, an Australian superannuation fund, that, as part of the terms of settlement of the McVeigh litigation, it would, among other things, take active steps to consider, measure and manage financial risks posed by climate change and other relevant environmental, social and governance risks; 
• the statement by Aviva that it also aims to reach carbon net zero by 2050 for its auto-enrolment default fund; and 
• the decision of the BT Pension Scheme trustee, which remains ambitious by comparison in aiming to achieve a carbon net zero asset portfolio by 2035. 

They also form part of a worldwide trend, as shown by the poll undertaken late in 2020 by Aviva’s investment management division of 535 pension funds and 532 insurance companies across 34 countries, representing combined assets of more than €2trn. That poll showed that four out of every 10 of the pension funds polled in Asia and Europe intended to reach net-zero carbon emissions by 2050. 

By contrast, only 17 per cent of the North American pension funds that were polled had also committed to achieving net-zero carbon emissions in the same timeframe. It has been suggested that the US Department of Labor’s strict regulatory approach, which emphasises the need for pension scheme fiduciaries to prove that they will not reduce financial returns by applying ESG considerations when making investment decisions, has inhibited similar action by US pension funds. 

Notable exceptions include the California Public Employees’ Retirement System (Calpers) which manages $412bn of assets and the United Methodist Church fund Wespath, which manages $24bn of assets, and which have signed up to the Net-Zero Asset Owner Alliance, a UN-backed group of 30 large asset owners who have committed to reducing carbon emissions in their portfolio linked to companies they invest in by up to 29 per cent within the next four years. Many will watch with interest to see whether and how the Biden administration brings about a change in regulatory emphasis and more flexibility for US pension funds to take ESG matters into account.

By contrast, the UK developments under way have had more political support and legal incentives will soon encourage further moves. The announcements from Cushon, Aegon and the National Grid UK pension scheme came during the week in which the House of Lords have approved the amendments made by the House of Commons to the UK Pension Schemes Bill ('the Bill'), thereby completing the 'ping-pong' stage in Parliament for the Bill. 

As noted in our previous blog post, the Bill marks a significant step in the area of climate-related investment in pensions, since it contains provision for regulations to be made requiring, for the first time, pension-scheme trustees to consider and report on climate change risks in relation to their investment strategy. Having passed again through the House of Lords, all that remains is for the Bill to receive royal assent (a formality) for it to be brought into force later this year.

It is clear that pension providers are taking the issue of climate change very seriously and that this is an area that continues to move at pace. The Bill will surely help to bring climate change to the top of pension trustees’ agendas. It will be interesting to see whether further pension schemes follow suit in announcing similar ambitions to reach net-zero carbon emissions in their investments by 2050 (or sooner).