UK pension schemes have led the way on net zero investment strategies. But do this stack up when little political progress has been made in tackling climate change. Christopher Marchant finds out more
The celebrations and goodwill that surrounded the 2016 Paris Agreement, an international agreement to rein in the catastrophic effects of climate change, are rapidly becoming a distant memory.
This agreement was an initiative led by US president Barack Obama. But the incumbent, Donald Trump, has withdrawn the US from this global compact entirely. And international support for net zero initiatives has waned in the intervening years, despite the fact that global temperatures have continued to climb, and catastrophic weather events have increased, both in size and regularity.
In the UK, the Labour government has kept national net zero targets, but both leader of the opposition Kemi Badenoch and Reform leader Nigel Farage have pledged to scrap targets for the UK to be net zero by 2050 if taking power.
“We are operating in what we call a disorderly transition,” says Elodie Laugel, chief responsible investment officer at Amundi.
“The transition is still happening, it is just no longer moving in a straight line. We’re seeing sharp contrasts in how fast different low-carbon technologies are scaling, a renewed push by every major region for strategic autonomy over its energy value chains, as well as certain setbacks in terms of climate policies. Physical climate risk is also
becoming increasingly important, and that has direct implications on assessing the companies invested in.”
Investment challenge
This all begs the question of how the disruption within the net zero transition is affecting investors. This
particularly applies to schemes in the institutional sector which may have made previous commitments
to decarbonise investment portfolios, while still serving members, who may themselves also have shifting priorities.
The stance of XPS Group, which is the administrator of the SEI Master Trust, is that many ESG factors are financially material, providing opportunities as well as risks, and therefore should be incorporated into the investment decision-making process in a similar way to market and liquidity risks. The firm therefore believes that
the integration of ESG factors and sustainable investing is consistent with fiduciary duty.
However, Alex Quant, head of responsible investing at XPS, is also cognisant of the issues such positions raise for retirement savers: “A topical example is oil and gas companies. A strategy may conclude that they exacerbate climate change, and if the transition to low carbon goes ahead these companies will not prosper in their current state, and so will divest.
“Yet given the current slow pace of the transition, there is scope for these companies to be successful in the short term, so an investor with a very short time horizon may take a different view. Removing the allocation to these
assets may also be detrimental to the retirement outcomes of an older member.”
Impact on manager selection
Many of the largest asset managers in the world are based in the US, and in an environment in which
ESG approaches have become the target of political partisanship, these firms have chosen to pull away from bold climate positions.
In January 2025, BlackRock withdrew from the Net Zero Asset Managers initiative following a “routine review of our continued participation in these groups.”
The Texas legislature had previously targeted BlackRock over its ESG policies and climate policies for years claiming it unfairly targeted the state’s oil industry, passing legislation that blacklisted the firm and pulled $8.5bn from its funds, only reversing this when the world’s largest asset manager changed its stance.
Also early last year, The People’s Pension removed £28bn from State Street Global Advisors, reallocating those assets to Amundi and Invesco to better align with its own updated ESG standards. State Street had previously
exited industry coalition the Climate Action 100+ in early 2024 and has since displayed extremely limited support for social and environmental resolutions put forward in subsequent AGM seasons, according to the ShareAction
Voting Matters report. It also pulled out of the NZAMi in November last year.
Following these changing institutional investor and asset manager behaviours, Harry Ashman, an engagement specialist at Robeco, explains the firm’s own approach to investment in companies associated with high emissions: “We prefer to engage companies to fully understand the issues at hand and leverage our position as an investor to encourage improvement.
“We believe this can lead to better outcomes for the company and society than divesting our holding to another owner that may not take the same approach to ESG issues. We also have dedicated engagement themes for companies flagged for controversial behaviour and climate and nature laggards, all of which can end in exclusion if the company does not make the desired improvements within specific timelines.”
Likewise, Invesco has in recent years added dedicated specialist personnel, along with proprietary tools and reporting capabilities, to support governance dialogue, proxy voting, and sustainability-related analysis in support of client objectives.
While Invesco recognises that the world has changed in recent years when it comes to climate approaches, it can also identify with those asset owners which are sticking to or even increasing sustainable approaches (as seen with the People’s Pension mandate).
Maximilian Kufer, head of sustainability strategy for the EMEA region at Invesco, says: “The responsible investment landscape has evolved significantly in recent years, and we recognise that there is a broad spectrum
of views among clients, regulators, and policymakers on these topics.
“Where clients seek sustainable investing solutions, we work to deliver those in alignment with their objectives. Where regulatory requirements apply, whether in the UK, Europe, or other jurisdictions, we comply at the relevant entity and product level. We continue to see strong and growing demand from institutional clients for stewardship, transparency, and sustainability-related capabilities.”
Changing regulatory landscape
When the value for money framework was introduced in Australia, it had a cooling effect on the ESG mandates of the nation’s superannuation funds as they chased returns as a matter of survival.
Emma Herd, co-lead at the EY Net Zero Centre and partner in climate change and sustainability, explains that changes in the country’s superannuation reporting have decreased the appetite to stray far from performance benchmarks, reducing appetite to sacrifice returns year on year. In the 2024 EY institutional investor survey, 60 per cent of Australian investors expressed intent to suppress the role of ESG in investment choices, even while they use more ESG information due to the growth in corporate reporting.
Now the UK has introduced its equivalent Value For Money framework, it remains to be seen whether it will have a similar impact on the ESG commitments of its pension schemes.
XPS’ Quant looks to provide a level-headed view: “The UK VFM framework proposed in is less restrictive (than Australia’s), given greater flexibility in how performance is assessed, including the use of multiple backward- and forward-looking metrics. This creates more scope to incorporate ESG considerations.
“That said, the requirement to compare against the average of commercial providers is likely to encourage some degree of herding and may temper risk appetite for more differentiated strategies, including innovative
strategies looking to tilt towards sustainability.”
With Reform continuing to perform strongly in polls, the potential for it being the party to form a majority in parliament following the next general election must also be considered. Its policies include bringing 50 per cent of the nation’s utilities under pension scheme ownership, and coupled with the party’s dismissal of ESG investments as a ‘woke’ endeavour, shows that in this scenario institutional investors may be guided towards investments with very short shrift given to climate considerations.
“Rather than legislation, we see it more likely that a future government may redistribute economic incentives, for example, away from sustainable projects,” says Quant.
“This may result in a change in decision-making from asset owners for example, and may make overseas renewable energy projects more attractive. This would of course have a detrimental impact on UK economic growth, thereby illustrating the importance of considering the second and third order impacts of policy changes carefully.”