On target: Our ambitious approach to climate change target setting


5 Jul 2023

Will Martindale sets out how NOW: Pensions is addressing the challenges of climate change.


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Will Martindale sets out how NOW: Pensions is addressing the challenges of climate change.

For UK pension funds, setting targets on any issue is never easy but is fundamental in order to make a system that it is better, and fairer, for all. Setting targets on climate change is no different, but it remains a key part of the investment governance process for pension funds. At NOW: Pensions we are proud of the steps we have taken to establish our targets on addressing climate change and the work we are doing to stay on track to meet them.  

Guidance from The Pensions Regulator (TPR) on Task Force for Climate-related Financial Disclosures (TCFD) reporting states that targets should “for at least one of your metrics; reinforce risk management, be scheme-specific, and not be chosen arbitrarily”. 

While targets are non-binding, reporting on progress towards the target is required. If you miss or replace your target, you should be held accountable.

Target setting

Near-term targets typically include a percentage emissions reduction, a target year and a base year. At NOW: Pensions we have committed to a 50% emissions reduction by 2030 based on 2019 emissions, as a near-term target.   

To track progress on this, setting a base year is important in order to hold yourself accountable and measure progress against the wider industry. The base year for countries is often when the countries’ territorial emissions peaked. In the UK, the target is to reduce emissions by 50% by 2030 and by 78% by 2035, compared to 1990 levels. For investors, the base year is typically 2019 (due to the Covid 19 pandemic, 2020 and 2021 were anomaly years).  

Longer-term targets can include the aim to meet the widely agreed commitment to net zero greenhouse gas emissions (not adding to the amount of greenhouse gases in the atmosphere) and by a pre-determined time. 2050 is often used because it is consistent with the UK government’s target and the Paris Climate Agreement, internationally agreed in 2015. 

Having targets is important because whether we as a society contribute to warming the planet by 1.5, 2 or 3 degrees, we will get to net zero; the real question is how long it takes us to get there. The longer it takes, the warmer the planet, and the higher the severity and frequency of weather-related events.  

Targets may cover scopes 1, 2 and 3, which refer to the three categories of emissions. 

  • Scope 1 – The greenhouse gas emissions a company makes directly through burning fossil fuels 
  • Scope 2 – The emissions a business makes indirectly through using energy  
  • Scope 3 – A combination of all emissions that an organisation can indirectly be responsible for across the value chain 

While many pension funds continue to raise challenges around Scope 3, at NOW: Pensions we have decided to disclose our Scope 3 emissions data. Currently, our targets refer to scopes 1 and 2.  

Investment and engagement

In our 2022 TCFD report, we committed to resist pressure to modify portfolios to meet headline portfolio-level decarbonisation targets at the expense of incentivising the real-world transition that is needed. Our goal is net zero greenhouse gas emissions globally – and we are seeking to maximise our influence to achieve this. 

Theoretically, pension funds could decarbonise their portfolio almost immediately by selling their investments in high-carbon economies, such as emerging markets, or high-carbon sectors, which range from energy, utilities to mining, manufacturing and transport.  

Indeed, emerging markets tend to have higher carbon footprints, in part because they produce carbon-intensive goods consumed by developed markets. They need capital to transition their economies. 

However, rather than withdrawing from these holdings we, and many of our peers, use stewardship. We engage with companies and, through our third-party managers, vote at companies’ AGMs, to encourage them (or if necessary, require them) to decarbonise more quickly. 

Successful stewardship should include escalation (some companies may disagree with us). And so, we exclude some polluting companies, especially where there is little evidence that the company will successfully transition, but our preference is, particularly in the first instance, engagement. 

Monitoring progress

To help us make progress towards our decarbonisation target, we have established a four-part framework.   

  1. Influence and support – we remain invested in those with credible transition plans in order to influence and support companies to change. Alongside our investment manager, and our third-party managers, we engage companies on our three priority sustainability themes: Climate action, gender equality and living wages. 
  1. Avoid or underweight – we avoid companies that we think will not successfully make the transition and represent stranded assets and underweight assets that are less likely to successfully transition. 
  1. Measure – we measure progress made towards our target and report back to our employers and savers through our annual TCFD reporting process. 
  1. Re-assess – we re-assess the progress of our investments against our planned decarbonisation pathway. If we believe that our approach needs to be adjusted, we communicate to our savers to explain why. 

Each year, we report on the progress we are making towards our target, with details on whether we are on track, and if not, why not.  

As part of this, we also set out the investment choices we have made that we believe will help us to decarbonise our portfolios and address financially material risks associated with climate change.  

Despite the challenges set out, so far, we are on target and continue to take steps to contribute to a more sustainable future.  

Will Martindale is head of sustainability at NOW: Pensions


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