What’s the context?
“Net zero” refers to achieving a balance between the amount of greenhouse gas (GHG) emissions produced and the amount of GHG removed from the atmosphere.
When human activities add no more GHG emissions than we take away, we reach net zero. Achieving net zero is important as, to eventually stop global warning, net additions of GHG into the atmosphere have to reach zero.
For an asset owner, setting a net zero target means identifying a point in time by which the net GHG emissions of all companies invested in will be zero. In order to be meaningful, a long-term net zero target will usually have interim targets for emissions reductions from a baseline level.
Importantly, adopting a net zero target would not necessarily mean that trustees could only invest in businesses that have achieved GHG neutrality themselves. The key is that the net emissions of the portfolio are balanced so, in the future, GHG-intensive businesses may still be held as long as those emissions can be offset elsewhere by carbon capture or other emerging technologies.
The law on net zero
Under the Pension Schemes Act 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (the Climate Change Governance Regulations), trustees of schemes in scope are required to meet certain governance and disclosure obligations on climate-related risks and opportunities which underpin the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
But the Government has so far steered away from imposing mandatory net zero targets on pension schemes. The Climate Change Governance Regulations do not require trustees to set such targets or any other mandatory targets to reduce portfolio emissions.
That said, a number of bigger schemes have chosen to adopt a net zero target for their investments. This is an approach that has been commended by the Pensions Regulator (TPR) in its Climate Change Strategy, and which some trustees are increasingly keen to explore.
For details on TCFD, see Climate disclosures
Net zero and fiduciary duty
Trustees’ consideration of any net zero commitment must be taken in the context of their fiduciary duties. That means such a commitment should be made where trustees consider that the commitment, and the actions that follow from making it, will support financially the provision of members’ pensions from their pension scheme.
See Fiduciary duties explained for more details.
Net zero as a financial factor
A net zero commitment may count as a financial factor within the defined parameters. Ultimately, it will be up to the trustees and their investment advisers to consider whether a net zero commitment (and the actions that follow from making it) will support financially the provision of members’ pensions.
Trustees may adopt such a commitment if it supports the scheme’s main purpose: paying members’ pensions.
Trustees can act prudently in making their investment decisions and may reasonably base their assessment of what a prudent investment strategy for their pension scheme would be, on an expectation that governments and policy makers will seek to deliver on their commitments to achieve net zero. Trustees should take investment and legal advice on this. A net zero commitment may form part of a prudent investment approach. However, it should be an overall objective, not a rule that limits future investment decisions. Trustees must always retain the ability to determine what is in the best financial interests of their scheme in respect of any given investment decision.
“Today we’re leading the world yet again in becoming the first major economy to pass new laws to reduce emissions to net zero by 2050 while remaining committed to growing the economy – putting clean growth at the heart of our modern Industrial Strategy.” Chris Skidmore June 2019
What are my compliance obligations?
There is no regulatory obligation to set a net zero target. The climate reporting obligations set out in the Climate Change Governance Regulations should be considered neither a reason for, nor against, trustees adopting a net zero commitment.
The regulations focus on improving climate change risk, governance and reporting, in line with TCFD recommendations. They include requirements on selecting and reporting on climate-related metrics and setting targets in respect of at least one of these metrics.
A mandatory net zero requirement was proposed during this legislation’s passage into law but ultimately did not make it into final legislation.
The Climate Change Governance Regulations prescribe matters that trustees must consider and disclose but do not oblige any particular investment approach. In particular, although there is a regulatory requirement to monitor a number of prescribed climate-related metrics and to set a target in relation to one of these, this need not necessarily include an emissions-based reduction target.
Achieving net zero means balancing GHG emissions with removals – a goal aligned with global climate commitments. For pension schemes, this involves setting long-term targets to reduce portfolio emissions while considering ESG factors in investment decisions.
Trustees play a critical role in managing transition risks and identifying opportunities, ensuring strategies uphold fiduciary duties and support sustainable outcomes for members.
In practice, meaningful disclosures on climate will not be possible without trustees undertaking certain governance activities. For the first time the Climate Change Governance Regulations not only tell affected trustees what they must disclose on ESG matters but also prescribe specific actions that they must take first.
What’s coming down the track?
The Government has consulted on requiring financial institutions to develop plans for their transition to net zero.
For full details on this consultation, see Transition plans
