Following his recent talk at a joint Association of Pension Lawyers and Society of Pension Professionals Event on ‘ESG and Trustees’ fiduciaries duties’, Michael Aherne considers how trustees should approach setting a ‘net zero’ target for their scheme.

With the increased focus on managing climate related risks, it is becoming increasingly common for UK pension scheme trustees and providers to set ‘net zero’ targets for their scheme. Typically, this involves setting a date by which the scheme’s activities will result in no net impact on the climate from greenhouse gas emissions (GHG) (on the basis that the amount of any GHG emissions put into the atmosphere by those activities is the same as the amount that is removed).

The scientific community has made clear that global emissions must be reduced to net zero by 2050 to meet the ambition set out within the Paris Agreement, notably to limit global temperature increases to 1.5°C above pre-industrial levels.

According to the Institutional Investors Group on Climate Change, a net zero ambition set by a pension scheme should focus on achieving two objectives:

  1. decarbonizing investment portfolios in a way that is consistent with achieving global net zero GHG emissions by 2050; and
  2. increasing investment in the range of ‘climate solutions’ needed to meet that goal (e.g. renewable energy, low carbon buildings and energy efficient technologies).

But what should trustees consider when setting such goals?

Trustees’ investment duties

The case law in this area has established that trustees must exercise their investment powers:

  • in accordance with the relevant provisions in the scheme’s governing documents (which could include restrictions on investments and exclusions);
  • for their “proper purpose” (which in a pensions context will be the provision of financial benefits for the scheme members in retirement and for their beneficiaries on a member’s death);
  • taking all relevant factors into account and ignoring all irrelevant factors;
  • in a manner that is not irrational (in the sense of acting as no reasonable trustee would have acted in the circumstances);
  • prudently; and
  • having taken proper advice.

There is also a statutory framework which overlays this, set out mainly in the Pensions Act 1995 and the Occupational Pension Schemes (Investment) Regulations 2005.  This applies to the vast majority of occupational pension schemes in the UK. The Investment Regulations, in particular, provide that trustees must inter alia invest assets in the “best interests of members and beneficiaries” and “in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole“.

The main area of tension in the law in recent times has been over the question of what are “relevant” and “irrelevant” factors for the purpose of trustee investment decision making. The courts have been clear that primacy should be given to “financial factors” as these go to the heart of the purpose of a pension trust (which is to provide pension benefits to members). Financial factors can be viewed broadly and should not be considered as narrow as simply “maximising returns”. Different factors will also apply to DB scheme and DC schemes. They can encompass factors such as the net risk adjusted return over the relevant investment period, the strength of the underlying employer covenant and the funding objectives of the scheme (for example, is the scheme looking to buyout with an insurer in the near to medium term?).

There may be circumstances in which trustees can take account of “non-financial factors”, such as members’ views of a particular investment or strategy. However, again, the courts have been clear these circumstances are likely to be very limited.

Therefore, generally speaking, whenever trustees make decisions about their scheme’s investment strategy (and any related investment policies) they need to ensure these are rooted on clear financial grounds.

Managing climate investment and funding risks and opportunities

Since October 2019, pension scheme trustees have been required to disclose their policy on how they take account of financially material factors, including relevant ESG considerations, in their investment decision-making. Trustees of larger occupational pension schemes, authorised master trusts and collective DC schemes are also required to:

  • identify and manage climate related risks;
  • assess the resilience of their scheme’s assets, liabilities and investment strategy and, in the case of DB schemes, funding strategy to climate-related risks and publish the results;
  • select at least one greenhouse gas emissions-based metric and at least one non-emissions-based metric, to set targets annually in relation to at least one of these metrics and to calculate, at least quarterly, the performance of the scheme’s assets against these targets; and
  • publish a TCFD report, inform members and report to the Pensions Regulator.

From 1 October 2022, these schemes will also be required to measure the extent to which their scheme is aligned with the goals of the Paris agreement.

Net zero targets and Paris alignment commitments

Against this backdrop and the urgency with which climate-related risks are now being seen, it is unsurprising that an increasing number of UK pension schemes are committing to reaching net zero by 2050 or before. However, care needs to be taken when making such pledges or commitments, in light of trustees overarching fiduciary duties.

Setting a pathway to transition to net zero via active stewardship, divestment and carbon offsetting, may well make both environmental and financial sense. But what happens if a scheme encounters bumps in the road (such as a disorderly carbon transition, adverse market movements or failures in Government or international climate policy) – can trustees make decisions (or remain committed to past decisions) that may have sub-optimal financial outcomes in order to achieve their net zero target?

The current pensions case law suggests not, meaning pension scheme trustees should make clear that their scheme’s net zero targets are subject to their overarching fiduciary duties to their members. They should also ensure that they take appropriate legal and investment advice before adopting, or revising, any such targets to ensure they take all relevant considerations into account, ignore irrelevant factors and that they follow a proper decision-making process. Trustees may also wish to consider having a bespoke net zero or Paris alignment policy with explains that the trustees’ approach is predicated on government and international policy continuing to be aligned with achieving the Paris Agreement targets.


If you would like to discuss what this means in the context of your scheme or organisation speak to your usual HSF adviser or contact the author.

Michael Aherne
Michael Aherne
Partner, Pensions, London
+44 20 7466 7527









Related resources:

Podcast: Pensions & ESG Ep 6 – A Smart approach to ESG

Podcast: Pensions & ESG Ep5 – ESG, the ‘teenage years’

Podcast: Pensions & ESG Ep4 – Greening Finance and Investment, Prof Iain Clacher, Centre for Greening Finance and Investment

Podcast: Pensions & ESG Ep3 – Responsible investment in practice, Caroline Escott, Railpen