Britain’s DB schemes increase allocation to climate aware funds

The sustainable investing divide across the Atlantic is becoming increasingly evident. It has been around since the US-led backlash began a couple of years ago.

Asset owners on this side of the pond have kept a close eye on developments. Several pension investors responded by taking sustainable investment back to the drawing board.

Emerging from their strategic retreats, the UK’s largest defined benefit (DB) pension schemes appear to have stood their ground.

NZI Climate Solutions Summit | 23 June | London | register here

New research from investment consultancy XPS Group shows 96% of schemes with over £5bn under management now invest in climate-aware funds – up from 77% the year prior.

Target traction

The research analysed public disclosures from 49 UK DB pension schemes, representing a collective £420bn under management. The sample is nearly evenly split between schemes managing over £5bn and those with over £1bn.

Commitments to net zero pathways are common across the board. 76% have held on to their net zero target. Every scheme with a long-term emissions target had an interim one too.

Supplementing targets with capital allocation is where differences emerge.

Larger schemes – who have an additional year of reporting experience under their belt – are leading the charge. Scale, by XPS’ account, is the single biggest differentiator between ambition and implementation.

“Larger schemes are increasingly translating targets into investment strategy, while many smaller schemes are yet to take the practical steps required”, says Alex Quant, head of ESG research at XPS Group.

Climate-aware investing

The research uncovered two approaches that translate emissions targets into climate capital allocation.

One, is investments in climate solutions. These are on the rise in both groups – large and small. 56% of larger schemes and 25% of smaller ones now report climate solutions exposure.

Climate-aware funds are the other avenue on the rise. XPS research shows one in two smaller schemes and 96% of larger schemes report investments in these funds.

XPS’s Quant says five years of TCFD reporting for larger schemes has resulted in portfolios evolving over time. “I think this is driven by a recognition that schemes can invest in a way which supports the climate transition, without compromising on their broader investment objectives”, he told Net Zero Investor.

Transition-aligned

Climate-aware investing also seems to reflect the on-going reshuffling of climate investment strategies – one that prioritises decarbonising the world outside portfolios.

Transition-aligned investing, as industry parlance often refers to it.

“It’s important that ‘climate aware’ doesn’t simply translate to ‘low carbon’, and that focus remains on investing with a transition-led focus, focusing on providing finance to solutions in hard to abate sectors, and engaging with laggards to real-world drive change”, explains Quant.

Quant also highlights the asset classes at play. “Much of this allocation to climate aware funds is in listed equity and corporate bonds, where the market for climate aware strategies is very well established; the challenge remains to integrate climate risks across the full investment portfolio”, he adds.

DB schemes seem to have embraced not only climate-aware investing but also transition-aligned capital allocation. All set against the backdrop of geopolitical volatility in energy markets.

If anything, Quant reckons, context has expedited progress. “Climate risk is not going away. Recent geopolitical tensions have reinforced that the transition will be shaped by energy security and inflation resilience as much as climate objectives”, he notes.

For now, larger schemes lead the way on translating targets into strategy. Will smaller schemes catch up? This time next year, XPS research will tell.

Longview Networks: Institutional Investment Conferences and Summits