Pension funds consult members on climate investing

The UK’s local government pension schemes have recently caught the ire of the Reform party. Richard Tice, the party’s deputy leader, accused funds of being inefficiently run, with “woke” climate-focused investments being “a meaningful cause of underperformance”.

On the other side of the political spectrum, the Canadian pension fund CPPIB continues to attract criticism from members who accuse it of not doing enough on climate, with some even taking their pension fund to court over an alleged failure to consider future climate risks.

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Both cases highlight the fiduciary dilemmas pension funds face. With feedback from members still limited, institutional investors considering climate- or ESG-focused strategies risk being accused of doing either too much or not enough.

But some pension funds have started to tackle this problem head on by seeking direct feedback from their members. The findings are often surprising.

In 2024, a chance encounter at a conference between Dr Emmeline Cooper, lecturer in sustainability supply chains, projects and sustainable systems at Cranfield University, and Rob Bauer, professor of finance at Maastricht University, sparked one of the largest examples of participatory democracy at pension fund level to date.

In collaboration with Bram van der Kroft from the Massachusetts Institute of Technology and Paul Smeets from the University of Amsterdam, the researchers invited 49 randomly selected members of the Dutch pension fund €30bn Pensioenfonds Detailhandel to a three-day, in-person deliberative process on the fund’s investment strategy, discussing the pros and cons of expanding impact investment strategies.

Acknowledging trade-offs was a key aspect, says Louise Kranenburg, manager of responsible investment at Pensioenfonds Detailhandel. “When we discussed responsible investment with participants, we were very open that there could be trade-offs. These could be lower returns, higher risks or higher costs.”

“For example, meaningful engagement or collaboration with companies can be impactful, but it is also resource-intensive. Those are trade-offs members should understand,” she added.

Despite these trade-offs, the assembly proposed increasing impact allocations. It was then crucial to take this to the wider membership, Kranenburg added.

“We again made a pre-commitment: whatever the outcome of the survey was, the board would follow it.”

The process resulted in a set of recommendations which were put to a sample of more than 200,000 members, with more than 13,000 responses — a significant sample of the fund’s 1.3 million members. Perhaps surprisingly, more than 40% of members voted to expand impact investing, while only 13% expressed a preference to stop it. As a result, Pensioenfonds Detailhandel’s board committed to increasing impact investments by €300m to €1.2bn.

“From an academic perspective, what’s interesting is combining deliberative democracy (deep discussion with a small group) with large-scale survey input,” Cooper explained.

“The deliberative approach is about being transparent and trusting people to form their own judgements. It’s about helping them think through what they want from retirement — not just financially, but in terms of broader outcomes like environmental conditions. There isn’t a single ‘right’ answer,” she emphasised.

The Dutch experience has been closely monitored in the UK, where Nest — which serves close to 14 million members — has also embarked on its own experiment with participatory democracy, working with, among others, Dr Emmeline Cooper.

As a defined contribution fund, Nest, like its peers, has faced mounting pressure from policymakers to increase allocations to private markets and to invest in the UK. Under the Mansion House Compact, 17 major pension providers, including Nest, have committed to allocating at least 10% of their portfolios to private markets by 2030.

The move has sparked criticism from some pensions experts, who warn that the risks of this push into unlisted assets will ultimately be borne by members.

At the same time, UK lawmakers have been considering an overhaul of the definition of fiduciary duty. Some politicians and environmental campaigners have argued that climate risk should be explicitly embedded within fiduciary duty, although the proposal did not make it past the House of Lords.

Nevertheless, pension funds — particularly defined contribution schemes with younger memberships — are keen to take the temperature of their savers, says Paul Todd, chief operating officer at Nest.

“This is not about replacing fiduciary duty or replacing the trustee. This is about taking the temperature of people.”

“It gives the trustee much more confidence… without going out on a limb, but they’re actually reflecting absolute opinion.”

Given the scale of the fund, the exercise initially seemed daunting, he acknowledged. “In a world where you’ve got 14 million members, how do you really try and get under the skin of what they think? That feels like a really powerful tool for helping the trustee either not do the wrong thing or give them much more confidence.”

Similar to the experience in the Netherlands, Nest invited a sample of nearly 60 members to convene with an independent expert panel. Participants were carefully selected to reflect the wider membership in terms of age, gender and ethnicity, Todd explained.

The assembly met over two weekends, producing a set of 30–40 recommendations, which are due to be released over the summer. While Nest is not yet publishing detailed findings, Todd suggested members were broadly supportive of the fund’s approach to climate, with some even expressing appetite for further commitments.

For Cooper, consolidation and regulatory reform could further encourage pension funds to embrace member consultation. After all, the UK sits on some £2tn in assets, and how that money is deployed will have implications for the wider public — but crucially must remain in members’ best interests.

As the pensions industry consolidates, governance and member engagement become more important. This approach helps bring member voices into decision-making and strengthens representation.

“I think the pensions industry has an important role to play in contributing to the democratic fabric of society — bringing people into decision-making and incorporating their perspectives into how decisions are made on their behalf.”

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