03 December, 2021

UK occupational pension schemes are being heavily encouraged to target net-zero across their portfolios by 2050 but taking action today is most important 


The UK pensions industry, government and the general population are united with their belief that the power of institutional investor capital should be harnessed to help limit climate change.  But while there is consensus on the need for long term net-zero emissions targets, occupational pension scheme trustees are not yet legally obligated to set net zero targets for their asset portfolios.


The IPCC Sixth Assessment Report, published in August, made it clear that immediate emissions reductions are vital to limiting global warming to 1.5°C degrees and thereby preserve financial stability. Mercer's own climate scenario analysis suggests that the 1.5°C scenario is an imperative for long-term investors. On that basis, it would therefore be in the long-term best interests of investors to support this outcome by taking action today, rather than simply hoping it will happen. The IPCC authors tell us that net zero is achievable, but only if we act now.


Multiple pieces of research indicate that pension scheme members want their scheme’s investment strategy to consider people and planet as well as profit. Asset allocation decisions play a central role in driving change as the prospect of securing more capital incentivises company management to improve their sustainability performance. 


The UK Pension Schemes Act 2021 has paved the way for new climate change governance and reporting requirements for large pension funds. As well as climate reporting, the Department for Work and Pensions is requiring trustees to set climate related targets no further than 10 years away, even if they already have longer term net-zero targets. The new regulations will steer trustees to focus on near term actions with their climate risk management.


At the European leg of our Global Investment Forum in London, leading pension scheme professionals shared their personal views on approaches to decarbonisation. Every client has a slightly different, and equally valid, opinion and it was very interesting to hear their views and learn how we can assist. Some of the themes discussed at the Forum included: 

Immediate emissions reductions are vital to limiting global warming to 1.5°C degrees and thereby preserve financial stability.
The UK Pension Schemes Act 2021 puts new climate change governance and reporting requirements on large pension funds.
  • Fiduciary duty of trustees means that climate considerations must be weighed against other financial risks.  It’s the trustee’s fiduciary duty to look after people’s pensions and manage the risks accordingly.

  • Trustees must resist being swayed by “the court of public opinion” and set achievable and appropriate targets that will ultimately be scheme specific. This includes acknowledging a large possibility that 2030 or 2050 targets  may not be achieved because of global economic, political and societal reasons that are out of all asset owners’ control. 

  • Focusing on a target that is very far in the future, like 2050, may come at the expense of delaying action today.  The important element is what you do today.

  • Wholesale divestment from a ‘grey’ sector may reduce the carbon exposure of your asset portfolio but will have insignificant real world impact if other investors continue to invest in those companies.

  • Trustees should have a strong understanding of how fund managers are incorporating climate change risk into their strategies and to make sure the funds a scheme is invested in are “on the right side of the transition”.

  • The task is not just about investment strategy but also making engagement with asset managers work better.  
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It is a real challenge, but we've got a lot of faith [in making it better].
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For more information on how Mercer can help with sustainable investment please visit our website or contact Vanessa Hodge

Our Expert

Vanessa Hodge

Vanessa Hodge

UK Sustainability Integration Lead

Vanessa’s role as UK Sustainability Integration Lead allows her to help asset owners take a pragmatic and structured approach to the important, but complex, subject of sustainable investment, and go beyond basic compliance in a proportionate way.

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