Only half of the UK’s largest defined contribution (DC) master trusts demonstrate a clear focus on climate transition alignment, despite almost all having a net-zero or Paris-aligned objective, analysis from XPS Group has revealed.

XPS Group’s latest investment briefing, Climate Strategy in DC Master Trusts, reviewed 16 large commercial DC master trusts open to new employers in the UK, covering more than £200bn in assets.

The research found that all but one of the master trusts had either a net-zero or Paris-aligned objective, with most targeting net zero by 2050 and one aiming to reach the target by 2040.

However, only 50 per cent referenced building their strategy around forward-looking considerations or resilience, or had underlying mandates explicitly considering transition alignment.

Furthermore, just two of the master trusts had an overarching target on transition alignment, with the remainder predominantly framing headline targets around reducing portfolio carbon emissions.

XPS argued that the focus should increasingly move away from simply reducing portfolio emissions towards a “transition-led” approach that considers how investments support the global transition to a lower-carbon economy.

The consultancy said this shift could help master trusts manage climate-related risks while also accessing investment opportunities that can improve long-term outcomes for members.

Its research also found that 56 per cent of the master trusts currently had an allocation to climate solutions, such as renewable energy, grid infrastructure, batteries, carbon capture and technologies supporting the decarbonisation of hard-to-abate sectors.

However, only 25 per cent had set an explicit strategic target to increase their allocation to climate solutions.

XPS noted that investments in these areas could create value and support stronger net returns for members, while also helping schemes address systemic climate risks.

Meanwhile, the consultancy highlighted the potential role of private markets in supporting transition-led strategies, with 13 of the 16 master trusts included in the research having signed the Mansion House Accord and committed to allocating at least 10 per cent of their default strategy to private markets.

It suggested that providers considering new private market allocations should assess opportunities with a specific sustainability focus, given that assets such as renewable energy infrastructure and natural capital are often accessed through private markets.

More broadly, XPS found that 88 per cent of master trusts included climate-aware funds within their default strategies, while 75 per cent had a scheme-level exclusion policy.

All of the master trusts identified engagement as an important part of delivering their climate strategy and referenced the role of systemic stewardship, either through engagement with policymakers or collective initiatives.

XPS stressed that climate strategy was particularly important for DC members because, unlike in defined benefit (DB) schemes, there is no sponsoring employer standing behind a funding shortfall.

As a result, climate-related physical and transition risks can feed directly into investment performance, retirement timing and the purchasing power of members’ retirement savings.

The analysis also found that awareness of nature and biodiversity risks was widespread, with all but one master trust making some reference to nature in its climate reporting.

However, XPS warned that the degree to which these issues were incorporated into investment strategies varied considerably, with few schemes currently indicating dedicated nature-related investment allocations.

XPS Group partner and head of responsible investment, Alex Quant, warned that having a net-zero target doesn't "automatically translate" to better outcomes for members.

“Focus needs to shift from reducing portfolio emissions towards investing to support the global climate transition and accessing the potential to enhance long-term returns for members,” he added.

“Those that translate climate commitments into investment decisions, stewardship and capital allocation effectively should be better placed to deliver strong member outcomes over the long term."

XPS also encouraged employers selecting a master trust to scrutinise prospective providers’ climate strategies, arguing that the management of climate risks and opportunities could become an increasingly important differentiator between providers.

It added that single-employer trust schemes could also learn from approaches being adopted by leading master trusts, noting that many of the investment solutions were available across the wider market and that scheme size should not necessarily prevent trustees from adopting similar approaches.

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