The increase in pension scheme members' interest in environmental, social and governance (ESG) friendly investments should be a “wake-up call” for a “lagging” pensions industry, according to the Association of Consulting Actuaries (ACA).

ACA's research, which is the fourth in a series of reports outlining the findings of the its 2020 Pension Trends Survey, found that 52 per cent of schemes reported a greater interest from members in ESG friendly investments.

The survey, conducted over the summer, revealed that 45 per cent of schemes took climate risk into account when appointing investment managers.

However, 23 per cent said that they took no account of climate risk in their manager selection decisions.

Furthermore, just 12 per cent of defined contribution (DC) schemes had a default fund that took account of climate risk, with a further 16 per cent reviewing their approach.

Although 37 per cent of DC schemes said that their members can self-select sustainable funds, 92 per cent of DC savers invested upwards of 80 per cent of their savings into default funds.

Commenting on the findings, ACA Climate Risk Group chair, Stewart Hastie, said: “As the owners of over £2trn of assets, UK pension schemes have a massive role to play in action on climate change risks. The ACA is supportive of aligning the reporting and governance of pension schemes on climate-related risks to the Task Force on Climate-related Financial Disclosures (TCFD) requirements.

"Whilst it is positive that some schemes have started to consider and take account of climate-related risks in investment matters, our survey findings show that many schemes have a long way to go to catch up with the ambitions of government and industry.

“The ACA believes the implementation of the TCFD requirements will need to be flexible and evolve as knowledge and experience of climate risk management develops in the UK pensions industry. To help schemes implement effectively and efficiently, we have called for The Pensions Regulator to produce an Annual Climate Risk Management Statement to guide trustees in this area.”

More than half (55 per cent) of defined benefit schemes stated that they have made, or are actively considering, asset allocation changes in their investments to minimise climate risks or enhance opportunities.

However, 36 per cent were not going to make asset allocation changes after reviewing their allocations and the same proportion had not considered climate change risk in the context of their sponsor’s covenant.

ACA Investment Committee chair, Vanessa Hodge, added: “This year’s survey underscores that defined contribution schemes are falling some way behind defined benefit schemes in both recognising climate risks and in reviewing how investments might need to be adjusted to mitigate, or take advantage, of climate challenges. Whilst master trusts are shaping their default funds to take account of climate risk, it seems many traditional DC schemes are relying on members to mitigate risk through their self-select fund options. This is a concern given the vast majority of members’ funds are invested in default funds.

“That said, many defined benefit schemes are responding more slowly than we might expect given the widespread public comment and government calls. Whilst it is encouraging that a large proportion are taking climate risks and opportunities into account at the strategic asset allocation level, over a third of schemes say they have not considered climate risk in their assessment of their sponsors’ covenants. This picture will change given increased regulatory focus on climate change and the lead given by pension professionals advising sponsors and trustees.”

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