Three-quarters of UK pension schemes have set net-zero targets

UK pension schemes accelerate climate commitments

Three quarters of UK pension schemes now have net-zero targets in place. This represents a substantial shift in how the sector approaches climate risk. Recent analysis shows 75% of schemes managing £420 billion have made formal commitments, up from 60% just one year ago.

The finding comes from the fourth annual review of Task Force on Climate-related Financial Disclosures reports, published in May 2026. XPS Group examined 49 pension schemes and found not just higher adoption rates but also improved quality in climate strategies. However, significant gaps remain, particularly among smaller funds and in aligning investment portfolios with the Paris Agreement’s 1.5°C warming limit.

For businesses, this matters beyond pension governance. Schemes increasingly assess the climate credentials of companies they invest in. Consequently, firms seeking capital or maintaining existing investments face growing scrutiny of their environmental performance and transition plans.

How pension climate reporting requirements evolved

Mandatory climate disclosure arrived through phased implementation. The Pensions Regulator and Department for Work and Pensions introduced requirements in two waves. Wave 1 schemes, those managing over £5 billion or covering 5,000 members, began reporting in October 2022. Wave 2 schemes, the medium-sized funds, followed in October 2023.

The framework requires four areas of disclosure. Schemes must report on governance structures for climate decisions, strategic approaches to climate risks and opportunities, risk management processes, and specific metrics including emissions data. This structure follows the international TCFD standard, which applies across financial services.

Progress varies sharply by scheme size. Among Wave 1 funds, 96% have adopted net-zero targets. In contrast, only 54% of Wave 2 schemes have made similar commitments. Furthermore, 88% of the largest schemes have credible strategies with interim milestones, whereas smaller funds often lack detailed implementation plans.

The Pensions and Lifetime Savings Association found similar patterns in its 2026 survey. Across a broader sample, 65% of funds have net-zero commitments. Of those without targets, 22% plan to adopt them within five years. The remaining schemes cite data gaps, cost concerns, or uncertainty about methodologies as barriers.

New requirements tighten from October 2026

In 2025, the Department for Work and Pensions announced additional measures. From October 2026, schemes must assess their investments against the Paris Agreement’s 1.5°C pathway. These expanded rules will affect over 80% of UK pension members, substantially broadening the reach of climate accountability.

The 1.5°C target represents the most ambitious Paris Agreement goal. Scientists consider it essential to avoid the worst climate impacts. Therefore, aligning investment portfolios to this pathway requires more than carbon measurement. It demands active portfolio adjustment toward lower-emission assets and engagement with companies to drive transition plans.

Government bodies are setting their own examples. The Pension Protection Fund, which safeguards defined benefit schemes, targets net-zero operations by 2035. This aligns with the UK’s economy-wide 2050 net-zero goal but moves faster, reflecting the urgency within pension governance.

The XPS review found that 75% of schemes with net-zero targets have clear plans aligned to recognized best practice. This suggests improving sophistication in climate strategy. Nevertheless, many investment portfolios remain misaligned with even the 2°C pathway, let alone 1.5°C, indicating substantial work ahead.

Investment portfolios show gradual shifts

Schemes are adjusting investment strategies, though progress remains uneven. Many have increased allocations to low-carbon assets, including renewable energy infrastructure and green bonds. Others have reduced exposure to high-emission sectors such as fossil fuels. However, complete portfolio realignment takes years and requires careful balancing of returns, risk, and climate goals.

Some schemes use exclusion policies, removing certain investments entirely. Others prefer engagement, using shareholder influence to push companies toward better climate performance. Both approaches have merits and limitations. Exclusion provides clear climate positioning but may reduce influence over transition pathways. Engagement maintains involvement but relies on companies following through on commitments.

Data quality presents ongoing challenges. Calculating portfolio emissions requires detailed company data, which varies in availability and reliability. Scope 3 emissions, those from supply chains and product use, prove particularly difficult to measure accurately. Consequently, schemes often rely on estimates that may understate true climate exposure.

Investment consultants report rising demand for climate-aligned strategies. Yet smaller schemes struggle with the cost and complexity. External managers may charge premium fees for specialized climate funds. Internal teams may lack expertise to evaluate climate risks independently. These barriers contribute to the gap between large and small scheme performance.

Essential facts about pension climate commitments

• Analysis of 49 UK pension schemes managing £420 billion found 75% have adopted net-zero targets, rising from 60% in the previous year.
• Large Wave 1 schemes show 96% adoption compared to 54% among smaller Wave 2 funds, highlighting a substantial size-based divide.
• Among schemes with targets, 23% aim for net-zero by 2040, while 44% target dates between 2040 and 2050.
• New regulations from October 2026 will require schemes to assess investments against the Paris Agreement’s 1.5°C pathway, affecting over 80% of UK pension members.
• Despite commitments, many schemes’ investment portfolios remain misaligned with Paris temperature goals, with strategies often falling short of even 2°C pathways.
• The Pensions and Lifetime Savings Association found 65% of surveyed funds have net-zero commitments, with an additional 22% planning adoption within five years.
• Among schemes with targets, 75% have indicated clear plans aligned to recognized best practice, showing improvement in strategy quality.

What these developments mean for UK businesses

Pension schemes control over £2 trillion in assets. Their climate commitments therefore influence which companies receive investment and on what terms. Firms in high-emission sectors face increasing pressure to demonstrate credible transition plans. Without clear pathways to reduce emissions, they risk divestment or higher capital costs.

Public sector suppliers encounter additional considerations. PPN 06/21, the government’s procurement policy note on carbon reduction, already requires contractors to report emissions and publish reduction plans. As pension schemes adopt similar assessment criteria, businesses face converging expectations from both public procurement and institutional investors. Our net-zero program for carbon reporting compliance addresses both requirements through a single framework.

Supply chain scrutiny intensifies under these trends. Pension schemes increasingly examine Scope 3 emissions, which include supply chain impacts. Manufacturers, logistics providers, and service companies may face questions from clients about their environmental performance. Those unable to provide credible data risk losing business to better-prepared competitors.

Small and medium businesses should note the October 2026 regulatory expansion. While it directly affects pension schemes, the requirement to assess investments against 1.5°C pathways will drive scheme managers to request more detailed climate information from investee companies. Businesses should prepare for requests covering emissions data, transition plans, and climate risk assessments.

Opportunities exist alongside challenges. Companies with strong sustainability credentials may access lower-cost capital or preferred supplier status. Green economy businesses, including renewable energy, energy efficiency, and circular economy firms, benefit from redirected investment flows. However, credible evidence matters more than claims. Schemes employ specialists to evaluate corporate climate strategies and can identify superficial commitments.

The size disparity among schemes creates varied timelines for change. Businesses dealing with larger pension schemes as investors or clients should expect sophisticated climate assessments immediately. Those connected to smaller schemes may have longer to prepare, though regulatory pressure will eventually reach all funds. Therefore, early action provides competitive advantage and reduces future adjustment costs.

Carbon reporting and emissions measurement capabilities

Accurate emissions data forms the foundation of credible climate strategies. Businesses without measurement systems struggle to respond to investor or client requests. Carbon reporting requires understanding three emission scopes. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 includes indirect emissions from purchased energy. Scope 3 encompasses all other indirect emissions, including supply chains and product use.

Many SMEs find Scope 3 measurement daunting. It requires gathering data from suppliers, estimating transport emissions, and calculating product lifecycle impacts. Nevertheless, pension schemes increasingly demand this information. The ESG compliance and carbon reporting services we provide help businesses develop measurement systems that satisfy both current requirements and anticipated future standards.

Reporting standards continue to evolve. The Greenhouse Gas Protocol provides the most widely used framework. UK companies may also reference ISO 14064 for emissions quantification or PAS 2060 for carbon neutrality claims. Understanding which standards apply to your sector prevents costly rework when investors request specific formats.

Technology helps manage complexity. Carbon accounting software can track emissions across operations, though costs vary widely. Smaller businesses may start with spreadsheet-based systems before investing in specialized tools. Either way, establishing consistent processes matters more than sophisticated technology. Investors value reliable year-on-year data over one-off calculations.

Transition planning beyond emissions measurement

Pension schemes want more than current emissions data. They seek evidence of transition plans showing how businesses will reduce emissions over time. A credible transition plan includes baseline emissions, reduction targets with dates, specific actions to achieve targets, and progress metrics. It also addresses risks and opportunities from climate change impacts and policy changes.

Science-based targets provide recognized validation. The Science Based Targets initiative offers methodologies aligned with climate science. Companies can set targets consistent with 1.5°C or well-below 2°C pathways. While voluntary, such commitments signal seriousness to investors and improve access to climate-conscious capital.

Sector context matters significantly. A manufacturer faces different transition challenges than a professional services firm. Schemes understand this and assess plans relative to industry circumstances. However, all sectors must show progress. Service businesses may focus on supply chain emissions and buildings energy use. Manufacturers must additionally address process emissions and product impacts.

Governance structures support credible transitions. Businesses should assign clear responsibility for climate strategy, typically at board or senior management level. Regular reporting to leadership demonstrates commitment. Some companies establish sustainability committees or appoint specific officers. The structure matters less than ensuring adequate authority and resources.

Training and capability development for climate action

Staff capability often limits climate progress. Finance teams may lack carbon accounting skills. Operations managers may not understand energy efficiency opportunities. Procurement teams may need guidance on supply chain emissions assessment. Addressing these gaps requires structured training rather than ad hoc learning.

The SBS Academy training on Scope 3 emissions covers supply chain measurement and reduction strategies. Such programs help businesses build internal capability, reducing reliance on external consultants for routine tasks. Moreover, trained staff can identify improvement opportunities that outsiders might miss.

Cross-functional collaboration improves outcomes. Climate action touches every business area, from purchasing decisions to product design. Creating forums where different functions share knowledge accelerates progress. Some businesses establish green teams or sustainability working groups. Others integrate climate considerations into existing management meetings.

Board-level understanding remains essential. Directors should grasp climate risks facing their business and sector. This includes physical risks from weather events, transition risks from policy changes, and liability risks from inadequate action. Non-executive directors with sustainability expertise can strengthen governance, though smaller businesses may access such expertise through advisory relationships rather than board appointments.

Resources for understanding pension climate requirements

Several authoritative sources provide detailed guidance on pension climate requirements. The Pensions Regulator climate change guidance outlines expectations for scheme governance and reporting. It includes practical examples and explains how requirements apply to different scheme sizes.

The Department for Work and Pensions publishes policy updates and consultation documents. These reveal emerging requirements before they become mandatory, allowing businesses time to prepare. The 2025 announcement on 1.5°C alignment, for example, gave schemes and investee companies 18 months to adjust.

Industry bodies offer valuable perspectives. The Pensions and Lifetime Savings Association produces research on implementation challenges and best practice. Professional Pensions and Pensions Age provide regular news coverage. These sources help businesses understand how requirements are interpreted in practice, not just regulatory text.

The XPS Group insights section publishes annual TCFD reviews and other research. While a consultancy, their analysis of public disclosures provides useful benchmarks. Similarly, the Pensions Age website tracks sector developments and emerging trends that may affect business relationships with pension schemes.