A new report from the Defined Contribution Investment Forum (DCIF) has highlighted stewardship and engagement issues being faced by some of the country’s largest defined contribution (DC) master trusts.

Katharina Lindmeier, senior responsible investment manager at Nest, told the DCIF that much of the “low hanging fruit has been plucked” as schemes have shifted strategies to include sustainability factors and low or zero carbon approaches.

The evidence is clear that reducing emissions in line with global goals is in the interests of scheme members, in order to ensure a healthy future for the economy and for individuals when they retire.

To make further progress means underlying companies and the wider economy needs to decarbonise, Lindmeier said. If this does not happen, “we’re going to be forced, potentially, to restrict quite a lot of what we invest in”.

‘Momentum has stalled’

While this has yet to happen, Nest has observed some companies backtracking on previous net-zero commitments, Lindmeier said.

“In the last two years, momentum has stalled, and in some cases, potentially reversed,” she explained.

“We’re in a slightly difficult position as an industry: where do we go from here? We don’t necessarily want to divest; it isn’t going to change anything.

“But realistically, how many more levers do we have if we’ve already voted against shareholder resolutions? Companies are just not listening to us.”

The master trust is exploring introducing a new approach as an alternative to divestment, whereby it would ‘freeze’ contributions into specific companies that were not engaging on climate issues. This would ensure that it retains a stake and its influence, while not allocating further capital to a company that was not fulfilling its promise or complying with Nest’s needs.

Meanwhile, NOW Pensions’ head of sustainability Keith Guthrie told the DCIF that the master trust had brought the management of its equity default fund in-house to ensure alignment with the master trust’s goals – following some unsatisfying experiences with external managers.

Guthrie said: “In one case, we found that while the strategy was decarbonising the portfolio, the asset manager was not really engaging with companies or voting in the way that the trustees wanted them to.”

Guthrie echoed Landmeier’s observation that some companies had “backtracked” on net zero commitments, leading to NOW Pensions excluding around 15% of the equity market from its portfolio due to the lack of a credible transition plan to net zero.

Positive findings

Despite the concerns raised by Nest and NOW Pensions, other contributors to the report expressed optimism about reaching the 2050 net zero target.

Sasha Miller, managing director of responsible investing strategy at Nuveen, said: “I think one of the things I’m heartened by is I don’t see any resistance to meeting net zero commitments; actually, the opposite, from an asset owner, client, asset manager perspective, which is great.

“They’re getting closer to their milestones, where they may have set a 2030 interim target, and they’re executing it. And therefore, they are expecting managers like ourselves to execute. So, I think things are progressing overall.”

Collaboration between schemes can help smaller players have an influence, as well as helping schemes cover more companies and issues, according to NOW Pensions’ Guthrie.

Louise Farrand, executive director of the DCIF and author of the report, said: “While it’s clear that pension schemes face challenges on the road to net zero, we think there are many reasons to be positive. When they join forces, pension schemes can have a voice that is louder than they would have individually.

“We hope this report gives DC schemes added confidence to make their voice heard as they move towards net zero alongside the rest of the economy.”

The report is available from the DCIF website.

Research from Hymans Robertson published last month showed that several of the UK’s largest pension insurers were ahead of their own net zero and decarbonisation targets.