UK pension schemes are holding assets that are misaligned with the climate transition, according to recent research by XPS Pensions Group.

The consultancy reviewed the taskforce on climate-related financial disclosures (TCFD) of 35 pension schemes, totalling £344bn in assets under management, relating to schemes above £1bn.

It said that progress is being made among schemes to manage climate risk as, according to its research report, most schemes reported changes to their portfolios to include climate-aware objectives into their mandates and to finance climate solutions more directly.

However, it said that there’s “room for improvement” for pension schemes, with more focus needed on transition alignment beyond carbon emissions reduction where most of the attention is currently.

This comes as XPS calculated that UK pension schemes have a weighted average of reported Implied Temperature Rise of 2.8°C. In comparison as part of the Paris Agreement, UK has committed to limit the temperature rise to 1.5°C.

This, according to XPS, indicates schemes are holding assets that are misaligned with the climate transition.

TCFD reporting

The report also highlighted shortcomings in relation to stress testing the financial impacts of physical risks in a high global warming scenario.

Additionally, as TCFD requires schemes to undertake scenario analysis every three years, the research found that 56% of £5bn+ schemes chose not to undertake analysis this year, and many of those who did undertake scenario modelling indicated that they did not find meaningful conclusions from the analysis.

The report presented four recommendations for scheme trustees including engaging in ongoing training to understand the latest TCFD developments, speaking to pension consultants on enhancing their climate strategy, assessing the transition alignments across their portfolios and considering the increasing range of funds with embedded climate objectives.

Alex Quant, head of ESG research at XPS, said: “TCFD has been pivotal in bringing climate change to the attention of pension scheme trustees.”

He added that many schemes have made good progress to address climate risks in their portfolios, but the majority must place more focus on transition alignment in order to better contribute to real world change.

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