From Net Zeros to Heroes

Legislation on the journey to net zero is gradually becoming more rigorous for pension schemes.  In October this year, schemes with between £1bn and £5bn in assets must comply with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD).

Preparation for the first wave of publications from schemes larger than £5bn has been a huge undertaking by schemes, advisors, and investment managers.

Despite the strides being taken incorporating climate considerations into Trustee governance, a survey in October last year by the Make My Money Matter Campaign found that 71 per cent of the UK’s largest pension schemes do not have credible plans for reaching net zero. Government expectation is for publication of transition plans to become the norm (see page 16) to support the target of decarbonising all sectors of the UK economy to meet net zero by 2050.

So, what is stopping schemes that represent almost £2trn of the pensions market from making a public commitment?

What does net zero mean?

At its most basic, achieving net zero means reducing the amount of greenhouse gas emissions associated with a pension scheme’s investments as much as possible, and then offsetting the remaining essential emissions. Carbon dioxide is the biggest long-term problem as it remains in the atmosphere for hundreds of years, but the Paris Agreement covers all greenhouse gas emissions.

Schemes are already being asked to monitor their greenhouse gas emissions and set reasonable targets to improve measures as part of their TCFD requirements. So far this doesn’t include being required to set a net zero target, but climate change is set to impact not only the assets and liabilities of schemes, but also the world in which members are expecting to retire.

Right here, right now

The temptation for many schemes may be to focus on things which are achievable in the near term, particularly when a scheme seeking a far-off net zero target date will have to ride out so much uncertainty to get there. The Department for Work and Pensions (DWP) itself suggests that long-term targets set by schemes for their TCFD requirements should not be more than 10 years into the future.

Trustees need to be realistic in their plan for net zero and accept this is a not a quick fix; it could be many years before they can fully achieve their goals.  Legislators are not expecting pension schemes to go from ‘climate villain to climate hero’ in the space of a few years.

Targets that schemes are working hard to monitor within TCFD reports will often become interim milestones to reaching overarching net zero targets.  Schemes should ask the question – “what should a scheme targeting net zero by ‘X’ date be doing today?” and keep asking that question on a regular basis, rather than attempting everything all at once.

She’s got a ticket to ‘free-ride’

Some schemes keep their ambitions close to their chest just in case they are accused of green washing or not going far enough, fast enough. The government target of net zero by 2050 is a significant marker for schemes heavily reliant on investments in government bonds to manage liabilities, and many asset managers have signed up to the Net Zero Asset Managers Initiative which commits to supporting that 2050 target date “or sooner”. Schemes may feel as though the evolving financial landscape provides support for transitioning to net zero with minimal intervention, and that it may seem unambitious to announce plans to follow along, or too ambitious to go faster alone.

Decisions about net zero targets are not created in a vacuum – there are many reasons a scheme may choose to align with pools of other market participants, with their own sponsor, or with the government. We believe that being transparent is a much better option than staying quiet as schemes may be challenged both internally and externally on their objectives. By choosing a target date, schemes can plan effective governance processes, set firm expectations for partners, create actionable initiatives, and periodically review their progress.

The time of “do nothing” has long since passed and legislation is hot on the heels of chasing it away.

Seek expert guidance if necessary

While legislation is encouraging trustees to really think about their climate risks and opportunities, the reality is that setting and monitoring carbon emissions targets can be a detailed process. The Pensions Regulator guidance on climate governance and reporting has provided some welcome direction, and I and my colleagues are on hand to decode the next steps. 20-20 Trustees has long been a vociferous supporter of climate action in the financial sector and we are currently navigating several schemes through the new requirements, whilst keeping an eye on future developments in the ESG space.  We can help schemes look at the big picture while at the same time help define the right targets to use on a scheme by scheme basis.

The sustainable economy is not the future – it’s in the actions of the present.  2022 is likely to see considerable progress on the issue and our advice to trustees is ensure your scheme is leading rather than following the net zero movement.

For further guidance on areas like Net Zero, ESG and Sustainability, visit us online today.