From measuring emissions to moving the dial

As our latest TCFD Report shows, USS reduced the emissions intensity of the non-sovereign assets in our defined benefit (DB) portfolio by 63% as at 31 December 2025 (relative to a 2019 baseline). Global emissions climbed relentlessly higher anyway.

This gap between what institutional investors can achieve by optimising their own portfolios and what actually needs to happen in the real world has led us to fundamentally rethink our approach to climate risk. Our portfolio has decarbonised significantly, but that alone has done little to change real-world emissions. Increasingly, our focus is shifting to helping create the conditions that enable the transition to happen in the real world.

USSIM speakers will feature at out Transition & Climate Investment Forum, click below for further details

The limits of carbon counting

Emissions intensity metrics have their place. They support disclosure requirements and provide a useful indication of portfolio exposures.

However, too often, they encourage investors to focus on reducing exposure to high-emitting sectors rather than supporting the transition of those sectors. A portfolio scrubbed clean of steel, cement, utilities or transport companies may look attractive from a reporting perspective while contributing little to the transition itself.

The reality is that many of the world’s highest-emitting sectors are also the sectors that must decarbonise if climate goals are to be achieved. Simply transferring ownership of those assets does not change their emissions profile. In some cases, it may merely move them to private ownership, where transparency is lower, but the underlying climate challenge remains unchanged.

Climate reporting remains important, and USSIM continues to publish detailed disclosures through our TCFD reporting. But disclosure should be viewed as a tool rather than an objective in its own right.

Why policy matters more than ever

Our evolving approach is rooted in a simple observation: policy is often the most important determinant of climate outcomes.

Investors can engage with companies, encourage better governance and support transition planning. However, the pace of change ultimately depends on the economic incentives facing businesses and households. Those incentives are shaped by policy.

Today, many of the barriers to decarbonisation are not primarily technological or financial. Increasingly, they relate to planning systems, permitting processes, grid infrastructure, industrial policy and regulatory uncertainty. While capital is available, the challenge is often creating a policy environment that enables it to be deployed efficiently.

This thinking informed our paper, The Policy Challenges of the Energy Transition, developed alongside Transition Risk Exeter (Trex) and the University of Oxford. The report argues that policy uncertainty itself has become a significant systemic risk for long-term investors. Investors are more willing to commit capital when the rules of the game are clear, stable and credible. The report also argued that policies to support the transition should be targeted to capture the specific needs of different sectors: cement and steel require different policy initiatives from transport or power.

It also reflects an evolution in our approach to stewardship. Engagement with individual companies remains important, but for large, diversified investors there are occasions when engagement on policy may have a greater impact than engagement with any single company because it shapes the environment in which entire sectors operate.

We would encourage all investors with long-term horizons to engage with policy makers and regulators across the globe to bring about change.

Policy uncertainty is not simply a climate issue. It is an investment risk.

A broader lens on climate risk

This shift in thinking is reflected in our latest TCFD report.

Historically, climate scenario analysis has often been conducted separately from the broader forces shaping the global economy. Investors would assess a range of temperature pathways and compare the resulting outcomes. While useful, USSIM increasingly felt this approach was too narrow for long-term investment decision making.

Climate change will not occur in isolation. Future outcomes will also be shaped by geopolitics, technological change and demographic trends. These forces interact with climate risk in ways that can materially alter investment outcomes.

A world characterised by rapid technological innovation and coordinated climate action will produce very different investment outcomes from one where geopolitical fragmentation disrupts supply chains and slows the deployment of clean technologies. Each of these worlds is likely to deliver different emissions trajectories, and the implications for growth, inflation, energy markets and returns on financial assets are likely to be very different.

For this reason, USSIM has moved away from treating climate as a standalone risk and instead assesses it within a broader set of themes encapsulated by a set of overarching scenarios. These provide a more integrated view of how structural forces may evolve and how they could affect long-term investment outcomes. Rather than asking solely what happens under a given temperature pathway, we ask how portfolios perform across a range of plausible futures where climate outcomes interact with wider economic, political and technological developments.

We believe this provides a more realistic and decision-useful framework for long-term investors.

USS overarching scenarios: strengthening our assessment of physical risk

The latest TCFD report also includes an enhanced assessment of physical climate risk.

Physical climate impacts remain one of the most significant long-term risks facing investors with decades-long investment horizons. Rising temperatures, changing weather patterns and the potential for more severe climate events can affect economic growth, infrastructure resilience and investment returns. Importantly, these risks are not confined to the distant future, with extreme weather events, supply chain disruptions and rising insurance costs already having tangible economic and financial impacts today.

USSIM has expanded our consideration of physical alongside transition risks and continue to incorporate emerging scientific understanding into our analysis. This includes greater consideration of climate tipping points, such as permafrost thaw and disruption to the Atlantic Meridional Overturning Circulation, and other outcomes that may be underrepresented in conventional economic models.

Given the significant uncertainty surrounding the timing, probability and economic impacts of these risks, we use them primarily to inform narrative and explore a range of potential outcomes rather than relying on precise point estimates. This approach acknowledges the limitations of current modelling while helping us consider risks that may not be fully captured by transitional frameworks.

While the timing and severity of such outcomes remain uncertain, they reinforce an important point: long-term investors cannot simply diversify away from a materially degraded climate system.

Universal owners ultimately depend on the health of the broader economy.

Looking beyond climate

USS’s scale gives us resources that many smaller funds do not have, but the principles are widely applicable.

Engage before divesting. Treat policy as a material risk factor. Look beyond backward-looking emissions metrics. Be honest about the limits of quantitative models as they are most effective when used to inform judgement, not replace it. And focus on resilience as well as transition opportunities.

Climate change remains one of the defining challenges facing long-term investors. But it is increasingly clear that it cannot be analysed in isolation. It sits within a wider set of interconnected economic, technological and geopolitical forces that will shape investment outcomes for decades to come.

The challenge is no longer simply measuring emissions. It is understanding the future — and building portfolios resilient enough to navigate it.

USS Investment Management manages assets on behalf of the Universities Superannuation Scheme, one of the UK’s largest private pension schemes. This article reflects the views of the author and does not constitute investment advice.