The ESG agenda for UK pension schemes faces a turning point, amid a US backlash against environmental and DEI policies, global economic uncertainties and a UK government focused on growth at all costs.
This shifting background is pushing trustees and asset managers to refine or reaffirm their ESG commitments, whether it be near-term net zero goals, or tackling wider social issues such as modern slavery.
But evidence suggests that in the UK at least, providers and asset managers remain committed to responsible investment principles. According to Isio’s latest Sustainable Investment Survey, most asset managers are continuing to build on their ESG policies, with 97 per cent having dedicated sustainability teams in place, despite global climate pushbacks and increased political scrutiny.
But this does not mean ESG policies are not evolving — with renewed focus on how these these strategies deliver real world impact, rather than simply box-ticking on key metrics.
Policy pressure
The US has seen some high-profile deregulation and a vocal anti-ESG movement. In the UK, the political climate has been quieter but uncertainty over pensions policy and a government agenda focused on economic growth are creating challenges for schemes.
Barnett Waddingham partner and head of DC investment Sonia Kataora calls it “a tumultuous time, both in terms of the global anti-ESG backlash and the seismic changes to policy and structure of pensions coming from the upper echelons of the UK Government.”
But she stresses that DC providers are standing firm and “sticking to their guns on sustainability”. She adds: “This is critical if they are to uphold their roles as stewards of capital.”
Others caution against expecting too much from schemes alone. Jones says: “Sometimes it feels as though there are huge expectations on schemes, as if they can drive the low-carbon transition themselves and clearly they can’t. They’re just one player in that ecosystem, albeit an important one. If you don’t have a supportive legislative framework, there are going to be quite serious limits on what schemes themselves can achieve.”
At NatWest Cushon, head of investment strategy Rahil Ram says schemes are adapting. He notes: “Sustainability strategies are evolving within the wider macro landscape. We are seeing more deliberate portfolio construction, with recognition of the role of key sectors and a stronger focus on both the transition to net zero and the physical risks of climate change.”
Meanwhile, Hymans Robertson’s head of DC investment Alison Leslie highlights the changing dynamics for managers. She says: “The landscape in which asset managers and companies are operating is changing significantly and there’s changing regulatory guidance. Those sorts of things are making engagement, particularly by asset managers, a bit more limited and more restricted.”
She notes that schemes are continuing to stand by their responsible investment beliefs, which she says are not swayed by political shifts. Most remain confident in the principles they have set and see no reason to change course.
Delivering impact
The focus for many schemes is shifting from box-ticking ESG exercises to strategies that are more keenly focused on driving tangible change in the economy — although in practice this can be hard to achieve. Jones notes that activity levels vary between schemes, adding that globally, “there isn’t enough action… the question is, is what schemes are doing proportionate?”
For Railpen’s head of sustainable investment, Adam Gillett, the priority is ensuring real-world outcomes are not overshadowed by portfolio metrics. He explains that neither portfolio alignment measures nor financed emissions fully capture climate risk or opportunity.
He says: “We will not prioritise these as inputs into capital allocation decisions but we should see progress on our alignment and emissions aims if we succeed in climate risk management, engagement and solutions activities.”
Ram highlights a similarly practical approach, balancing return, risk and impact. He points to decarbonisation and nature-based investments, including their Natural Capital fund, which aim to “protect our members against future climate risk uncertainty and maximise their pot sizes for retirement.”
He says: “It’s a real challenge we need to prepare portfolios against, and that’s why we’ve put in a lot of work for our members to pioneer in this space.”
Leslie notes that many larger clients now set emissions targets and develop action-focused plans. These may not always be full climate transition strategies, but they typically include levers to help achieve their sustainability goals.
Net zero targets
Most UK pension schemes pursuing net-zero targets are looking to deliver a 50 per cent reduction in carbon intensity by 2030, though Jones stresses this is not mandatory.
She says: “There is no requirement to have a 2030 target. It’s just the common target that most schemes have chosen. There are no formal requirements and schemes don’t necessarily have something that looks like a five-year plan.”
Instead, she points to “a set of levers and shorter-term actions” guiding progress, including climate or ESG-tilted index funds, though she cautions that “whilst that’s a really effective way of decarbonising your portfolio it doesn’t do a great deal to change emissions in the real world.”
Since publishing its first net-zero plan in 2021, Railpen has made progress on climate solutions, engagement and alignment.
Gillett agrees with Jones, but highlights that systemic climate risk is growing rapidly, noting that even if individual portfolio goals are met, these risks could undermine the broader economic and social systems everyone depends on.
Ram says schemes are reshaping portfolios to ensure both reduced carbon intensity and credible decarbonisation plans. “Our strategy already has a 60 per cent lower carbon footprint than global equities, with a clear path to an 80 per cent reduction by 2030. We think a clear, detailed pathway is key; setting long-term decarbonisation targets without a plan and avoiding immediate action is an inadequate response to this challenge.”
Leslie notes: “It’s about monitoring where you are relative to that plan. And then it’s effectively course correction as you go along. Can we realistically achieve net zero using listed equities? The answer is more than likely no. You’ll need to do something else like private markets to actually help you along the way.”
Stewardship
One way to help for schemes to deliver impact is more effective stewardship, by facilitating conversations with asset managers and investee companies that lead to tangible, real-world change.
Trustees are placing greater emphasis on direct engagement with managers rather than simply relying on annual ESG reports.
Jones stresses the importance of seeing ESG efforts first hand. She says: “I wouldn’t put a huge amount of emphasis on annual reporting per se. I would strongly recommend meeting with managers and hearing firsthand what is going on. You may find that the reports are less informative, which provides an opportunity to have discussions to get a better sense of what’s happening on the ground.”
She argues that schemes should demand more granular engagement reporting from managers moving beyond counting the number of company meetings to assessing whether specific objectives have been set, acknowledged, acted upon and delivered.
“Being able to report against those milestones actually provides a more effective way for trustees to monitor and see if they’re having a real-world impact,” she adds.
Kataora highlights the role of scale in driving influence within the investment landscape, but stresses that it is not a requirement for effective stewardship. She says: “Larger providers can wield significant influence by directing capital away from underperforming managers. But smaller schemes can also use their powers effectively; some of the leaders on ESG are smaller schemes.”
Meanwhile, Leslie explains that stewardship involves actively engaging with asset managers to understand their strategies and requesting case studies that demonstrate tangible impact.
She adds: “Stewardship is all about using your ownership rights to discuss with asset managers what they’re actually thinking about, what they’re doing to drive change and asking for particular case studies that actually demonstrate where they’ve really managed to make a change.”
Beyond carbon
Carbon remains the headline metric for many pension schemes, but experts stress the need for a broader set of sustainability measures. Jones argues that “you need a suite of metrics to cover a range of sustainability issues,” cautioning that targeting emissions intensity alone “directly risks driving the wrong behaviour.”
She points to biodiversity, water and social issues such as modern slavery as areas gaining more attention.
Jones adds: “Modern slavery is a priority for a number of schemes, worker rights often crops up a lot and then we see focus on nature. That’s coming up more.”
Ram highlights the need to broaden the focus of investment oversight beyond carbon. He says: “Material sustainability risks beyond carbon must be part of investment oversight.”
He notes that as data quality improves, these previously less-considered metrics are becoming more measurable and influential in investment decisions.
“Some of our targeted investments address sustainability directly. For example, our Natural Capital fund addresses biodiversity outcomes directly.”
Leslie notes that when clients set their responsible investment priorities, they usually focus on two or three areas, with modern slavery often included. Trustees push managers to show “what they’re doing to actually assess the risk… how far down the supply chain they have looked,” citing examples like Fidelity’s modern slavery exposure assessment and similar initiatives by Legal & General.
She also stresses the connection between climate and biodiversity. She says: “You can’t talk about climate without talking about nature or biodiversity, water scarcity or air quality. Then you can start to build up more of a picture around where your greatest risks are in your portfolio.”
Performance
Experts agree that trustees need to ensure that net-zero strategies align with their fiduciary duty, balancing sustainability goals with member outcomes.
Jones emphasises: “Net zero is always subject to fiduciary duty. I wouldn’t be expecting net-zero targets to have a negative impact on performance in isolation. If net-zero targets are met collectively and we get a reduction in climate risk, then that will be better for member outcomes than if we see climate breakdown.”
Kataora echoes the view that sustainability and performance can go hand in hand, stressing that the focus should be on how capital is allocated and stewarded rather than simply the size of assets.
Ram also highlights the importance of integrating return, risk and impact into portfolio design. “We stay focused on objective risk-return analysis, long-term compounding and protecting members’ outcomes. Our investment in the natural capital fund is a prime example of that, it’s about protecting them against future market shifts, maximising pot sizes and considering the world they will retire into.”
Technology challenges
Emerging technologies like artificial intelligence are also raising ESG considerations. Jones notes AI is “both a risk and an opportunity,” with questions ranging from energy use in data centres to systemic economic impacts, alongside a focus on data and cyber protection.
She says: “It’s thinking about what kind of guardrails we can put in place to make sure that AI is being used ethically so it doesn’t undermine the future performance of the economy.”
Gillett sees technology as a supportive tool, not a replacement for human judgment. He prioritises “effective risk management and engagement,” using data and dashboards to guide, rather than dictate, decisions.
Meanwhile, Ram highlights how stewardship and technology work together. “Better data enables better oversight. Technology is enabling richer, more accurate climate data, for example geospatial tools that assess the physical risks facing investments, which leads to better portfolio decisions. But with AI moving fast, the risks of weak governance or flawed analysis must be actively managed too.”
Leslie points to emerging analytics tools that strengthen risk oversight, particularly for social issues. “There’s a number of things coming online. One of the things we really like in modern slavery is that there’s an asset risk exposure analytics tool that looks at identifying social and human risk. As we build up towards better datasets, better understanding in terms of social metrics and analytics with climate and nature, we’ll have a much better way of assessing risk.”
Integration
Experts don’t expect UK pension schemes to abandon ESG strategies altogether, but these are likely to evolve, becoming accountable and more focused on outcomes that matter in the real economy.
The current legislative and political turbulence makes stewardship more, not less, important, according to Kataora.
Gillett says: “Looking ahead, we are deepening our focus on achieving real-world emissions reduction, and on how Railpen can best play its role in driving this change. Jones agrees but is pragmatic about pace and scope of this change. She says: “Schemes are one player in the ecosystem action is needed by others as well.”
Success, experts agree, will be measured not by the appearance of ESG reports but by the real-world change these schemes drive beyond their portfolios.