Pension funds must be willing to recalibrate net-zero targets, says consultancy

Pension funds with net-zero pledges must regularly reassess their targets to manage unintended financial risks, Barnett Waddingham has said.

In a research note, the consultancy said the unlikelihood of achieving global net-zero emissions by 2050 meant that providers “face trade-offs and cannot blindly reduce emissions”.

Doing so could, for example, entail portfolios becoming highly concentrated if there is a limited pool of investible opportunities consistent with their climate goals, it said.

“A key test will be interim targets set with reference to 2030,” Barnett Waddingham added.

“Providers should not be afraid to recalibrate accordingly, as delivering for members means balancing portfolio decarbonisation with managing climate transition and physical financial risks and, as much as possible, driving lower real-world emissions.”

Barnett Waddingham’s research note was focused on UK defined contribution (DC) pension providers, but Sonia Kataora, partner and head of DC investment at the consultancy, confirmed that the lessons highlighted are relevant to defined benefit schemes (DB).

“While the funding dynamics differ, the principles around setting, reassessing and recalibrating net-zero targets apply more broadly,” she said. “The point made about scale not being essential also makes this relevant for a wider range of DB schemes.”

In the report, Kataora noted that, at a time when the government was pushing for minimum size thresholds for DC providers, it was important to remember that although scale can amplify impact, it does not guarantee sophistication.

Both larger providers and smaller schemes could use their powers effectively, she said, “focusing their resources on the things that really matter to their members and collaborating to impact policy”.

The consultancy’s research, conducted annually, found that 35% of DC scheme growth assets are exposed to investment managers who have stepped away from climate collaboration initiatives, such as the Net Zero Asset Managers initiative.

For those DC providers “facing a difference in opinion with their investment managers” over ESG, Barnett Waddingham said it was calling on providers to improve their monitoring, take more control of voting, and take an active role in reviewing manager decisions and initiatives.

The research drew on anonymised data from 18 leading DC pension providers, covering 25 default investment strategies used across master trusts, contract-based, and bundled own-trust schemes.

The latest digital edition of IPE’s magazine is now available