28% of schemes unlikely to adopt climate risk reduction targets

Whilst a third (33 per cent) of pension schemes have set or are in the process of setting targets to reduce their climate-related risk, a further 28 per cent do not intend to set a target at all, industry research has revealed.

The initial findings of the Association of Consulting Actuaries' (ACA) 2021 Pension Trends Survey found that, of the 33 per cent of schemes that have set or are in the process of setting a target, half have included an emissions-based target, with the majority (70 per cent) of these being a net-zero target.

However, more than three-quarters (78 per cent) of schemes are looking to their asset managers to engage with the businesses in which they invest on climate issues.

This is despite nearly half (41 per cent) of schemes acknowledging that their members are showing greater interest in environmental, social and governance (ESG) issues compared to two years ago.

Improvements were seen, however, as 73 per cent of defined benefit (DB) schemes had reviewed their sponsor covenant for the potential impact of climate change, a 9 percentage point improvement on the number of schemes looking at the impact on their scheme sponsors compared to 2020.

ACA climate risk group head, Stewart Hastie, commented: “UK pension schemes are a massive influence on the asset management industry including how the climate related risks and opportunities are identified, assessed and managed.

"It is hugely encouraging that a third of schemes are already setting climate-related targets.

“The examples set by these schemes taken together with continued government pressure to require TCFD disclosure across the chain of assets, managers and investors, will help to accelerate the number of schemes opening their eyes to the risks of climate change on long-term financial health and the need to do something now and not later.”

Adding to this, ACA chair, Patrick Bloomfield, highlighted the findings as demonstration that the pensions industry is "rising to the defining challenge of our age", stating that he is "hugely optimistic" that the influence of COP26 and government regulation has taken the industry "past a point of no return".

“Pension schemes are well underway integrating climate risk into their strategies," he continued, clarifying however, that there are concerns about "a hard core of trustees putting their head in the sand on climate issues, which is putting their members’ retirements at risk".

He said: “It’s important to remember that pension schemes exist to pay income to their members in later life, not to facilitate other social policy aims. Actuaries’ and trustees’ priority is to make sure that the transition to a low carbon economy doesn’t derail their scheme’s funding.

“This makes pension schemes influential accelerators of climate transition, through climate savvy investments and influencing the businesses they invest in via their asset managers; but these actions must be driven by schemes’ own long-term interests.”

A full report on the findings of the survey will be published early in the new year.

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