Smaller pension schemes are lagging on climate action when compared to larger counterparts, according to new research from XPS Group.
It found almost nine out of 10 of larger schemes had “credible” net zero implementation plans, compared to an average of just six out of 10 across all schemes reviewed.
XPS Group found that almost all schemes with assets over £5bn have now set net zero targets compared to just over half of smaller peers.
This is likely to further support government and regulatory action to drive further consolidation across the DC sector, with larger schemes better placed to focus on this governance and risks posed by climate change, while also driving investment into private markets, which are increasingly seen as an effective plank of more climate aware investment strategies.
This findings are in XPS Group’s fourth annual review of the annual climate reports schemes have to published under the Task Force on Climate-related Financial Disclosure (TCFD) regulations.
XPS Group reviewed 49 UK schemes with around £420bn in assets. This includes 25 larger schemes with assets over £5bn who have been producing TCFD reports since 2021. It also covers 24 smaller schemes of less than £1bn AUM who have been required to produce these TCFD report since 2022.
The XPS data found that progress and momentum among these small schemes when it comes to net zero targets had had slowed, with just 54 per cent having set targets.
XPS says 88 per cent of larger schemes set a net zero strategy this was underpinned by clear interim targets and adjustments to their investment approach. By contrast, only 33 per cent of smaller schemes meet the same standard.
The report also looked at other carbon metrics disclosed in these TCFD reports. It says that , despite improvements in disclosure and data quality, among schemes reporting the metric, the average Implied Temperature Rise (ITR) among schemes reporting the metric remains unchanged at 2.4°C.
XPS Group points out that while this is below the 2.6°C warming projected under current global policies, it remains above the Paris Agreement goal of limiting warming to below 2°C, reflecting ongoing exposure to transition risk.
The report also identifies a gradual shift towards more forward‑looking climate strategies. The proportion of schemes setting explicit engagement targets has risen to 33 per cent, up from 24 per cent in 2024, signalling increased focus on influencing investee companies rather than divesting alone.
XPS Group head of ESG research Alex Quant says: “TCFD reporting has undoubtedly brought climate risk into the mainstream for pension schemes, parts of the market have fallen into a steady-state pattern. Larger schemes are increasingly translating targets into investment strategy, while many smaller schemes are yet to take the practical steps required.
“Climate risk is not going away. Recent geopolitical tensions have reinforced that the transition will be shaped by energy security and inflation resilience as much as climate objectives. Trustees should focus on practical action: understanding their highest‑risk holdings, making greater use of forward‑looking metrics, and challenging managers on how they are engaging with companies that are misaligned with the transition.”
