More UK pension schemes are setting targets on transition alignment, according to analysis by consultancy XPS Group.
Although the most popular focus for setting targets is on carbon emissions, half of the schemes in XPS’s sample have set targets for transition alignment, an increase from last year.
“This is encouraging and we are supportive of more schemes focusing on forward-looking alignment and contribution to the climate transition, not just backward-looking carbon emissions metrics and/or data quality,” said XPS.
The consultancy analysed the mandatory climate reporting of 48 schemes, 23 of which reported for the third time last year and 25 of which reported for the second time, in accordance with a staggered implementation of the requirements based on the volume of schemes’ assets.
On the topic of transition alignment, XPS said the majority of schemes had chosen exposure to companies with targets verified by the Science Based Targets initiative (SBTi) as their transition alignment metric. There was a significant increase in the proportion of ‘Wave 2’ pension schemes doing so, it noted.
Net zero target credibility
XPS also found that three-quarters of UK schemes have adopted net zero targets and that the credibility of these had improved; 75% of schemes with net zero targets indicated “clear plans aligned to best practice such as the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investor Framework”, said XPS.
The consultancy also found that 69% of schemes had made a change in asset allocation to address climate risks, an increase “suggesting that climate risk analysis is driving change in investment decisions”.
Around four in 10 schemes (42%) indicated some direct investment in climate solutions, with XPS saying it suspected this would increase year-on-year “as the opportunities and availability of low-carbon solutions (such as renewable energy and natural capital) increases over time as new research and development evolves”.
Engagement was still the primary mechanism for addressing climate risk, reported by all Wave 1 pension schemes and 76% of Wave 2 schemes. For the latter, this was a decrease from 82%.
The average Implied Temperature Rise (ITR) metric of the schemes reported was 2.4°C, XPS said, although this is based on 17 schemes that reported ITR covering an average 46% of their assets, totalling £33bn (€40bn) of assets.
“This is lower than the latest scientific estimates of global progress (2.7°C), but above the Paris Agreement goal of keeping global warming at least below 2°C, suggesting schemes are holding assets at risk of value deterioration as the transition accelerates,” said XPS.
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