DC at a crossroads: new pathways to net zero

The event was opened by chair Alison Leslie, head of DC investment at Hymans Robertson, who highlighted that the industry is undergoing a period of monumental change. From Mansion House reforms to the Value for Money (VfM) framework, the policy backdrop could have far-reaching implications for climate investing.

These themes were reflected in findings from the inaugural DC Investment Survey, produced in collaboration with Schroders, which showed respondents increasingly planning allocations to private markets. 

Click here for a detailed report of the survey findings

Value for Money reforms reshape the net zero debate

One of the key changes facing DC investors is the UK government’s review of Value for Money, with the emphasis shifting from a narrow focus on costs towards better long-term outcomes for members. According to Hilkka Komulainen, global head of sustainability and impact at Quinbrook, the changes bring both opportunities and risks, with DC investors facing a growing danger of “valuer blindness”.

She warned that a short-term focus on fees can disadvantage long-term net zero assets such as infrastructure, while an outcomes-based approach could enable a more holistic perspective. “Net zero delivery really happens in private markets. The range of opportunities is far more interesting in private assets,” she said.

Natalie Winterfrost, director at LawDebenture and trustee at the SEI master trust, cautioned that providers still face intense competition and that VfM cannot solve everything. “If you underperform your peers in the short term, as a commercial master trust you could be in trouble,” she warned.

Jonathan Parker, managing director and head of DC at Redington, emphasised that VfM and net zero investing operate on fundamentally different timelines. “VfM is backward-looking. With net zero, you’re making decisions based on the future state of the world. How you marry those two, I’m not quite sure,” he said.

In contrast, Eva Cairns, head of responsible investment at Scottish Widows, expressed optimism that a stronger focus on long-term outcomes could align well with ESG considerations. She stressed that there is no inherent trade-off between transition investing and returns. “Net zero and climate change are financial risks, not an add-on,” she said.

Retirement investing meets climate reality

One of the areas most affected by change will be retirement-stage portfolios, which currently account for relatively small asset volumes compared with growth-stage funds.

More than a decade after the launch of auto-enrolment, schemes are preparing for a future in which members retire primarily on DC savings — and face the real-world impacts of climate change during retirement.

James Monk, investment director at Fidelity International, highlighted a seeming paradox between retirement investing, typically built around shorter time horizons, and climate strategies focused on 2050 outcomes. However, he noted that warming thresholds may be breached sooner than expected, making climate risk highly relevant even for near-term retirees.

Mark Searle, head of DC investment at XPS, argued that net zero ambitions could be integrated into decumulation strategies, particularly as people work longer and require higher returns. “We need higher-return allocations in retirement because people are retiring later. Growth allocations should be higher and glidepaths should start later,” he said.

Paul Tinslay, professional trustee at Dalriada, cautioned that there remains a poor understanding of members’ income needs in retirement. He also warned that regulators’ approach to guided retirement could introduce new risks. “I am very much looking forward to government indemnity for trustees when they get these decisions wrong,” he said.

Katharine Patel, associate partner and head of DC at Aon, added that retiring on DC savings alone remains largely untested, even in more mature markets. “I am optimistic about retirement and net zero working together, but we are still in the infancy stage. We haven’t yet seen the big wave of people retiring on DC, and a one-size-fits-all approach is not going to work,” she said.

Natural capital edges into DC portfolios

Natural capital remains relatively new to DC investors. However, around a quarter of UK DC schemes plan to increase allocations to the asset class, according to the Longview Networks/Schroders DC Investment Survey.

Cadi Thomas, head of sustainable investment at Isio, noted that while many asset managers have embraced the theme, DC schemes have been slower to follow.

Graham Cook, former co-head of investment strategy for sustainability at Phoenix and now a non-executive director at the Transition Pathway Initiative, argued that natural capital can play a valuable diversifying role and should be treated as an infrastructure-style allocation.

Mathew Roberts, partner at Fulcrum Asset Management, acknowledged that natural capital is among the least liquid asset classes and that DC investors have been cautious. “A lot of regulation has led us away from finding time to make great investment decisions. If we start focusing on that again, the natural conclusion will be an allocation to natural capital,” he said.

Stewardship under pressure to prove its worth

The afternoon panel turned to stewardship and engagement. Leanne Clements, head of responsible investment at the People’s Partnership, opened with a provocative question: who in the audience recognised the financial value of stewardship? She was met with silence — a response she said she expected.

She argued stewardship has reached a crossroads where its financial benefits can no longer be assumed. Investors should take a more holistic approach, from manager engagement to peer collaboration and systems-level thinking, she said.

Alexandra Christiansen, lead portfolio manager at Nordea Asset Management, agreed that effective stewardship depends on practical considerations such as access to management and willingness to change. But the link to value creation must be clear. “If something is good for the climate but bad for the share price, companies are not going to do it,” she warned.

Rethinking equity strategies for the transition

Most DC schemes still rely heavily on index-based equity strategies, largely due to cost pressures. A panel discussion questioned whether this approach limits investors’ ability to influence climate outcomes.

Thomas Hohne-Sparborth, head of sustainable investing at Lombard Odier Investment Managers, argued that climate investing shares many features with active management. “As an active manager, you have to be a bit contrarian — we are always looking for mispricing opportunities,” he said. After post-Glasgow exuberance, he suggested today’s market offers more attractive entry points into transition assets.

He added that climate forecasts do not require consensus to create opportunity. Just as equity analysts differ on the outlook for a company such as Volkswagen, investors can hold differing views on firms’ ability to adapt to climate change — and that divergence creates opportunity.

From an asset owner perspective, Rahil Ram, head of investment strategy at NatWest Cushon, said forward-looking metrics are becoming increasingly important but that identifying decision-useful data remains challenging.

Mohammed Khalil, sustainable investing strategist at Phoenix Group, argued that combining forward- and backward-looking metrics is essential to assess corporate resilience on a warming planet. He also stressed the importance of staying invested in high-emitting sectors to drive real-world change.

Searle added that active management could play a greater role in DC pensions in future. “Clearly, there are a whole range of good reasons to be in active strategies,” he said.

Venture capital enters the DC conversation

Turning to a more niche segment of DC portfolios, Beverley Gower-Jones, founder and managing partner of the Clean Growth Fund, discussed venture capital opportunities with James Lawrence, director of investment proposition at Smart Pension.

Gower-Jones welcomed survey findings showing that 22% of DC investors are considering venture capital allocations. She cited Victorian engineer Joseph Bazalgette, who built London’s sewer system, as an example of transformative infrastructure — arguing that today’s challenge is identifying the next equivalent breakthrough.

Smart Pension is preparing to allocate around 2% of its default fund to venture capital, Lawrence said. “We think the future of net zero is about demonstrating real-world impact,” he added.