2030 targets: how can DC investors move beyond the low-hanging fruit?
DC investors have made some progress on climate change, with most major master trusts setting net zero targets and cutting emissions. But is the hardest work still to come?
TCFD reports might not make for the easiest read, but skimming through the figures disclosed by some of the UK’s largest master trusts could offer some much-needed grounds for optimism on net zero. By 2030, all of the largest master trusts plan to cut the carbon footprints of their portfolios in half, with Cushon and Smart Pension even aiming for an 80% emissions reduction, according to recent Net Zero Investor research.
Moving targets
However, moving beyond those targets could become increasingly challenging, as David Russell, chair of the Transition Pathway Initiative, acknowledged at Net Zero Investor’s Annual Defined Contribution Forum. He highlighted that many DC investors had focused their efforts so far on the listed equity side of their portfolios, where relatively easy victories could be achieved through tilts and divestments. However, he warned that only half of all assets are currently covered by net zero targets, citing recent IIGCC data.
“We have to move away from carbon footprints to thinking about the kind of world we want to see moving forward,” he urged.
“The challenge is that the 2050 target is an absolute target, while the interim targets are intensity-based. But to get to the end, we need absolute targets in place. Pension funds don’t have that switch point yet, but we have to start thinking about how we change our targets from where they are now to where they need to be,” he warned.
Jonathan Parker, MD and head of DC at UK consultant Redington, reinforced the positive short-term outlook for DC. Revealing that some DC master trusts had already met their initial targets, he predicted that most were well positioned to meet their 2030 ambitions.
“Looking beyond 2030, there’s a lot more work to be done,” he cautioned.
“DC schemes do not operate in a vacuum, and the political and social backdrop for net zero is becoming more challenging. It will be difficult for DC providers to maintain their 2050 targets if the real-world economy is falling off track,” Parker argued.
For UK investors, an additional challenge could be the implementation of the Mansion House agenda. While greater allocation to private markets could diversify portfolios and potentially enhance returns, it might also increase the overall carbon footprint of portfolios and make climate disclosures more complex, Parker pointed out.
How climate-ready is your portfolio?
With the US exiting the Paris Agreement and the world looking increasingly unlikely to meet its 1.5-degree target, some delegates in the room felt that it was time to move beyond mere tick-box exercises and instead focus on the climate readiness of portfolios.
David Russell criticised the fact that, while most investors now use scenario analysis, what is missing is actionable insight.
“Scenario analysis involves a lot of money being spent on something that doesn’t add a huge amount of value to anybody, apart from highlighting to members that climate change needs to be addressed,” he said.
Parker shared that many of the funds he worked with were now starting to prepare for worst-case scenarios.
“As it increasingly looks like an orderly transition is perhaps less likely, our clients are starting to think about more dramatic tail-risk hedging scenarios to protect against the real downside of climate change.”
However, he also stressed that while the period of “overinflated optimism” had passed, now was not the time to give up on tackling global warming.
“We all need to double down on engagement with companies and sectors that are particularly challenging. We are responsible for trillions of pounds of capital, and the deployment of capital can have real weight. Especially in this moment, it’s important to remember that we do have agency,” he stressed.
Where do the UK's DC master trusts stand on meeting their net zero targets?
