Is Your Pension Fuelling the Climate Crisis?

NOW pensions, The People’s Pension and Nest, known as Master trusts, are all publishing their latest annual reports on Climate-related Financial Disclosures (TCFD).

The Pensions Regulator (TPR) has provided climate-related insights in line with the soon-approaching Paris Agreement.

By 2030, TPR aims to achieve operational net zero emissions for the areas it has greatest control over like: gas, electricity, waste, business travel and water. 

Additionally, by 2050, the company is committed to a science-based net zero target covering all operational emissions – both milestones will ensure at least a 90% reduction in emissions.

The three master trusts’ reports confirm they are on track to achieve net-zero emissions by 2050, with half or more achieved by 2030.

Master trusts making progress

Nest's default strategy allowed Scope 1 and 2 emissions to fall by 18%, producing 40.7 tonnes of CO2 per £1m invested (nearly US$1.3m).

Nest’s equity allocation footprint was reduced by almost 10%, with Nest’s report noting the reductions “have mostly been driven by changes in the make-up of the portfolio.” 

Andrew Cheseldine, a professional trustee at Capital Cranfield comments: “The important point is carbon intensity is going down…Calculations are internally consistent, so tracking schemes year-to-year is accurate, but comparing schemes is far less reliable.

“Nest, which has a lot of resources, provides a good benchmark and has been pushing the boundaries for a long while. It has always been ahead of the game.”

The carbon output from NOW Pensions’ equity and credit investments covers scope 1 and 2 emissions. The organisation emphasises its commitment to decarbonisation by focusing on “transforming underlying activities rather than opting for divestment.”

The NOW report states that CO2 emissions fell from 63.1 tonnes per £1m (nearly US$1.3m) invested to 52 tonnes year on year due to its “recent change in strategy and the nature of our investments being less carbon-intensive”.

Assets with a clear, responsible investment objective accounted for 75.2% of NOW Pensions’ total portfolio and 76.3% of its default investment strategy.

The Global Investments Fund’s footprint fell by 53% to 31.5 tonnes of carbon dioxide per £1m invested (nearly US$1.3m). In comparison, the Pre-Retirement Fund’s emissions dropped by 36% to 38.1 tonnes per £1m (nearly US$1.3m) invested.

Bobby Riddaway, a professional trustee and managing director of HS Trustees states: “Master trusts are doing the right thing, the right way, and producing reports TPR will like. There are a lot of positives and they’re very detailed. The reports show they are taking it seriously.

“There are some very good moves forward, such as NOW Pensions delegating to Cardano and The People's Pension making significant sustainable equity investment…I like that they are looking to potentially account for nature and biodiversity. They’re the big takeaways – but they’re all hidden within really detailed, long reports.”

What is the impact?

TCFD reports are designed to improve the reporting of climate-related financial information; there is no requirement to actually decarbonise – it’s just strongly advised.

Andrew further comments: “Disclosure has run out of road and we need to take the next step. We should widen it to include biodiversity and social issues and move on to transition action plans and get money into impact investments.

“We need to be careful we don’t impose extra costs,” he says. “It’s all very well being ahead of the curve, but not if that means lower performance. The bottom line is we need to make sure members get value for money.”

Although master trusts are making meaningful progress on decarbonisation, more can be done.

Bobby adds: “Where these reports fall down is their lack of discussion about allocating to proper impact investments…It has done its job (TCFD); we realise climate change is serious and could decimate financial values”.

The TPR report

The Pensions Regulator (TPR) has outlined its strategy to achieve net zero carbon emissions, detailing its commitments, targets, and the steps it plans to take:

Net Zero Goals

• 2030 Target: Achieve operational net zero emissions for areas under direct control, aiming for at least a 90% reduction in these emissions
• 2050 Target: Attain science-based net zero emissions across all operational activities, encompassing the entire value chain with a minimum 90% reduction in total emissions

Alignment with National and International Strategies

• TPR's approach aligns with the UK government's Greening Government Commitments, targeting a 45% reduction in overall emissions and a 17% reduction in direct emissions from the 2017-2018 baseline by 2024-2025
• TPR's plan contributes to several UN Sustainable Development Goals (SDGs) including:
  • SDG 11: Sustainable cities and communities
  • SDG 12: Responsible production and consumption
  • SDG 13: Climate action
  • SDG 14: Life below water
  • SDG 15: Life on land

Baseline Emissions and Scope

• TPR uses the 2022-2023 period as the baseline for measuring progress toward its net zero targets
• The 2030 target focuses on Scope 1 and Scope 2 emissions, which are under TPR's direct control
• The 2050 target includes Scope 3 emissions, addressing the broader value chain and indirect emissions

Interventions and Strategies

• To achieve the 2030 target, TPR plans to:
• Enhance energy efficiency in its operations
• Transition to renewable energy sources
• Implement waste reduction initiatives
• Promote sustainable business travel practices.
• For the 2050 target, additional focus areas include:
• Decarbonising the supply chain
• Reducing emissions from employee commuting and home-working.

Monitoring and Reporting

• TPR commits to transparent reporting on its progress toward these targets
• The organisation plans to publish regular updates and performance data to ensure accountability and continuous improvement.

Impact on Scope-3 emissions

Here are the relevant categories and how the master trusts it under these:

• 1 (purchased goods and services): Efforts by NOW Pensions and Nest to decarbonise through "transforming underlying activities." will include changes in the portfolio composition, likely to involve the emissions from purchased financial services and goods within their investments

• 3 (Fuel and energy related activities): Decarbonisation strategies are focused on reducing carbon intensity from equity investments and aligning energy-related impacts, including electricity sourcing and its upstream impact

• 6 (business travel): TPR’s operational net zero strategy explicitly includes business travel

• 7 (employee commuting): In its long-term 2050 strategy, TPR mentions reducing emissions from employee commuting and remote working

• 11 (use of sold products): The emission reductions achieved by master trusts are tied to their investments' performance and carbon intensity, covering the lifecycle emissions associated with the financial products they manage

• 15 (Investments): These reports primarily focus on reducing emissions tied to financial investments, which fall under this category. Both NOW Pensions and Nest highlight reduced carbon footprints for their equity and credit portfolios.

These categories showcase the breadth of Scope 3 emissions addressed by the strategies and disclosures of master trusts like NOW Pensions, Nest and The People’s Pension, emphasising their commitment to holistic decarbonisation.

By setting these ambitious targets and outlining a clear pathway, TPR aims to lead by example in the financial sector's transition to a low-carbon economy.

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