Defined contribution (DC) pension schemes in the UK are bucking the global trend of retreating from environmental, social, and governance (ESG) investing, as research revealed a 34 percent increase in allocations to climate-targeted funds since 2021.
The finding, outlined in the ‘DC Sustainability Report’ from consultancy firm Barnett Waddingham (BW), comes in spite of a wave of global anti-ESG sentiment, particularly among US institutional investors.
BW said that most DC pension providers recognise the financial risks posed by climate change and are responding by increasing the investment they allocate to climate-aware growth funds.
The finding supports recent research detailed in the Benefits Expert Guide to Sustainable Workplace Pensions 2025, which found that the majority of UK pension providers have continued to make meaningful progress in cutting the carbon footprint of their default funds.
The data in the Benefits Expert Guide shows that the average emissions intensity across 19 major DC pension schemes fell by 19.3 percent in 2024 compared to 2023. Providers such as NatWest Cushon and The People’s Pension are leading the way with the lowest carbon footprints among their peers.
The guide highlights a growing disconnect between UK schemes and their global investment managers, a trend also emphasised in the BW report.
Researchers at the independent consultancy found that on average, 35 percent of growth-stage DC assets are still exposed to fund managers who have exited high-profile climate collaboration initiatives.
Investment managers including BlackRock, Vanguard, State Street, and Northern Trust have withdrawn from the Net Zero Asset Managers (NZAM) initiative and Climate Action 100+ (CA100+), with many saying they prefer to take an independent climate stewardship approach. BW emphasised that collectively, these firms manage US$25 trillion in assets, which is about a quarter of global GDP in 2024.
BW said that investment managers moving away from climate initiatives are part of a wider trend. Since June 2023, 71 investors have left CA100+, many in response to increasing anti-sustainability pressure, especially in the United States. Asset managers there have faced legal challenges from 11 US states, with critics alleging ESG investing oversteps fiduciary duties.
In contrast UK DC providers are asserting their role as stewards of capital, pressuring investment managers to up their ESG game. An investor coalition led by The People’s Pension has called on asset managers to demonstrate credible stewardship strategies. In a show of intent, the pension scheme recently moved £28 billion in assets away from State Street, pointing to concerns about the firm’s stewardship practices and sustainability objectives.
BW said the divergence between UK DC schemes accelerating efforts to reduce carbon emissions and investment managers actively pulling away is stark. It said: “Where DC providers back ESG, but investment managers do not, the industry must find a way forward to achieve the best outcomes for members.”
The consultancy also urged the pensions industry to embrace the complexities of ESG, saying that high scores in league tables don’t always mean providers are driving meaningful change. Conversely, lower scores may not necessarily indicate a lack of action. Of the pension scheme strategies reviewed by BW, 15 have targets to reach net zero by 2050, with three aiming for 2040, while two have no targets at all.
Yet, with the UN now warning that the chance of achieving a global net zero target by 2050 is “virtually zero,” BW said DC schemes must be realistic about the road ahead.
It stressed that DC providers will face trade-offs and cannot blindly reduce emissions. They will need to regularly reassess their net zero targets to manage unintended financial risks, for example if climate-friendly investment opportunities are limited.
One test will be interim targets set for 2030. BW urged providers to adjust their strategies accordingly, as delivering for members means balancing portfolio decarbonisation with managing climate transition and physical financial risks and, as much as possible, driving lower real-world emissions.
BW was clear about what DC providers that have a different take to their investment managers need to do. It urged providers to improve their monitoring, take more control of voting, and take an active role in reviewing manager decisions and initiatives.
Sonia Kataora, partner and head of DC investment at BW, said: “Despite the winds of change blowing in a new direction, DC providers are holding firm and sticking to their guns on sustainability. This is critical if they are to uphold their roles as stewards of capital, achieving the best outcomes for members financially.
“It is certainly a tumultuous time, both in terms of the global anti-ESG backlash and the seismic changes to policy and structure of pensions coming from the upper echelons of the UK government. Those pushing for minimum size thresholds for DC providers must remember that scale alone does not guarantee sophistication.
“Of course, scale can amplify impact. Larger providers can wield significant influence by directing capital away from underperforming managers, and they have a unique position to push for stronger stewardship and set higher standards for responsible investment. But smaller schemes can also use their powers effectively, focusing their resources on the things that really matter to their members and collaborating to impact policy; some of the leaders of the pack on good ESG are smaller schemes.”
