Defined contribution master trusts are taking different approaches towards climate change and there are clear leaders and laggards in different areas, according to a report by consultancy XPS Group.
The analysis covered 16 large commercial DC master trusts open to new employers in the UK, holding over £200bn in assets.
All but one master trust in the analysis had a net zero or Paris aligned objective. Yet only half were found to have a clear focus on transition alignment, with most targets still based on portfolio decarbonisation.
In addition, while 56 per cent of the schemes had a current allocation to climate solution investments, only 25 per cent have a strategic target to increase their allocation to solutions.
All but one scheme referred to the importance of nature in its climate strategy, with most positioning this as an engagement priority, yet very few of the master trusts indicated any direct nature-based investments.
The XPS report also stressed that the effect of climate-related physical and transition risks flows directly through investment performance, retirement timing, and the real-world purchasing power of DC members’ retirement savings.
Therefore, DC master trusts, who are responsible for a significant and growing portion of all UK retirement savings, should ensure climate risks are managed effectively within their portfolios, and opportunities captured, in order to deliver on their outcomes promises to members.
Only two master trusts had a published strategy on how to fully align its portfolio with the climate transition. There was however progress embedding sustainability into default strategies including climate aware funds, something undertaken by 88 per cent of the master trust schemes.
Alex Quant, head of responsible investment at XPS Group, says: “While net zero commitments are now commonplace, the next stage of development will be defined by how effectively master trusts translate these ambitions into investment decisions, stewardship activity and capital allocation.
“Master trust trustees and the provider should proactively review their strategies to ensure they are aligned to best practice, to manage the real-world financial consequences of climate change on their investment portfolios. We’ve seen examples of strong collaboration between trustee and provider leading to effective development of the climate strategy.”
XPS also claimed that one potential opportunity for master trusts to meet strategic targets is through the use of private markets, where many investments such as renewable energy infrastructure or natural capital sit. Of the 16 DC master trusts covered under the analysis, 13 have signed up to the Mansion House Accord and committed to making at least a 10 per cent allocation to private markets within the default strategy.
Clarity AI’s analysis, covering 886 high-emitting global firms that publicly report green CapEx, has also shown that companies with a climate target aligned to 2°C or lower allocate 27 per cent of their capital expenditure to green projects, barely ahead of the 25 per cent average for companies with no stated target.