There is a growing divide between larger and smaller pension schemes on climate action, with 88 per cent of larger pension schemes having a credible net-zero implementation strategy compared to 33 per cent of smaller schemes, XPS Group analysis has found.

XPS Group’s fourth annual Task Force on Climate-related Financial Disclosures (TCFD) review examined how 49 UK pension schemes, representing approximately £420bn in assets, were addressing climate change risks in their strategies.

In the sample, there were 25 larger schemes, managing more than £5bn in assets, and 24 smaller schemes, managing between £1bn and £5bn in assets. In the UK, TCFD reporting has been mandatory for the larger schemes since 2021 and the smaller schemes since 2022.

The firm assessed credibility by looking for alignment with frameworks such as the International Investors Group on Climate Change (IIGCC) Net Zero Investor Framework.

The report found that almost all (96 per cent) of the largest pension schemes in the sample had set net-zero targets compared to 54 per cent of smaller pension schemes.

XPS Group head of ESG research, Alex Quant, said: “TCFD reporting has undoubtedly brought climate risk into the mainstream for pension schemes, and parts of the market have fallen into a steady-state pattern. Larger schemes are increasingly translating targets into investment strategy, while many smaller schemes are yet to take the practical steps required.

“Climate risk is not going away,” Quant continued. “Recent geopolitical tensions have reinforced that the transition will be shaped by energy security and inflation resilience as much as climate objectives.”

Quant added that trustees should focus on practical action, such as understanding their highest risk holdings, making greater use of forward-looking metrics, and challenging managers on how they are engaging with companies that are misaligned with the transition.

In addition, the analysis found the average Implied Temperature Rise remained at 2.4 degrees Celsius. This is below the 2.6 degrees Celsius warming projected under current global policies, but above the Paris Agreement goal of limiting warming to below 2 degrees Celsius, reflecting ongoing exposure to transition risk, according to the firm.

---