Three years ago, Cushon Master Trust caught the industry’s attention with its claim to offer the “world’s first net zero pension fund” by using carbon offsets to mitigate its financed emissions. This was a bold promise for the UK’s still nascent defined contribution (DC) market.
At the time, most DC providers were predominantly invested in equities, and even some of the larger funds had not yet established a net zero strategy. However, last year, Cushon appeared to step back from its original promise, no longer claiming to be net zero. Net Zero Investor caught up with Marc Barnett, who recently joined the master trust as Head of Investment and is set to speak at our Annual Conference, to learn more.
Marc Barnett will speak at Net Zero Investor’s Annual Conference on 24 October – sign up here
Scaling challenges
From the outset, Barnett emphasises that while Cushon has abandoned its claim to be net zero, it has no intention of dropping its ambitions. ESG investing will be central to his work, as he has been brought on to design the fund’s investment strategies. “We think ESG resonates with our members, fostering a connection between their money and doing good, which leads to better engagement with the pension scheme. And that engagement ultimately results in more savings and better outcomes for members.”
So why did the fund drop its net zero claim? Barnett explains that the strategy always had a finite capacity, which was quickly reached due to the rapid growth of the master trust’s assets. In 2021, Cushon had £2.3bn in assets under management. Through a combination of acquisitions, investment returns, and member contributions, assets have now grown to £2.7bn.
“We launched the net zero pension proposition in 2021 with a finite capacity, which we reached quickly. It was designed to highlight what’s possible in terms of reducing emissions. It wasn’t about our operations—it was the emissions from our investments that were offset. The science has evolved, and now the focus is on reducing emissions first, using offsets only for residual emissions,” Barnett adds.
He argues that Cushon never intended to scale the net zero strategy across the entire default portfolio. “It was more about demonstrating what could be done. But, yes, scaling with rapid growth is a challenge, and for new clients and most of our default strategy, we’ve shifted focus to emissions reduction without relying on carbon offsets.”
In practice, this means the fund focuses on low-carbon companies within its equity holdings, which account for 75% of the portfolio. Around 15% of the default fund’s portfolio is invested in private markets through the Schroders Capital Climate LTAF fund, which has hard carbon reduction targets. Within its 10% fixed-income allocation, Cushon focuses on managers with low-carbon and social impact mandates.
Despite this revised approach, Cushon still scores highly among its peers. A recent comparison of DC providers on climate ambitions, produced by Make My Money Matter, ranks Cushon fourth among the top 20 DC providers. The ranking highlights the fund’s commitment to a 1.5-degree target and its high levels of transparency regarding climate disclosures.
It is notable that the other funds topping the Make My Money Matter league—Aviva, Legal & General, and Nest—are significantly larger than Cushon, suggesting that, in terms of climate ambitions, Cushon is punching above its weight.
Cushon’s decision to drop the net zero claim coincided with its acquisition by major UK high street lender NatWest. A coincidence? Barnett is keen to stress that NatWest’s acquisition of a majority stake in Cushon has not weakened the fund’s net zero ambitions.
“Cushon operates independently of NatWest, so our net zero ambitions are unchanged. However, being part of the NatWest Group provides us with better insights, data, and resources, allowing us to approach our strategy more effectively. For instance, we can now use more sophisticated data on decarbonisation projections,” he stresses.
Expanding private market allocations
Like many of its UK peers, Cushon has publicly backed the UK government’s Mansion House pledge, committing to invest at least 5% of its default fund in private markets. Barnett emphasises that this pledge does not require a significant change in strategy, as Cushon is already invested in private markets.
Cushon launched its first LTAF in the UK in partnership with Schroders in 2022, a year ahead of the Mansion House pledge. Barnett describes the process as a gateway into private market assets, including climate solutions.
“We believe climate solutions offer potential high returns and diversification from traditional asset classes, but they’re hard to access in public markets. Renewable projects, climate insurance companies, and vertical farming are the solutions of the future. We think our members should have access to those opportunities.”
Cushon is now considering how to integrate private markets into decumulation strategies. Currently, DC decumulation strategies in the UK remain heavily focused on long-dated fixed-income assets. However, with high inflation and volatile bond markets, this has proven far from risk-free. During the 2021 gilt crisis, many UK retirees faced double-digit losses, prompting DC providers to rethink asset allocation for decumulation strategies.
Unlike some of his peers, Barnett believes private markets should play a role in decumulation strategies. Indeed, Cushon already has some private market assets in its drawdown strategy.
However, Barnett acknowledges that LTAFs may not be the best vehicle for this: “LTAFs are somewhat clunky, with lots of regulation and costs. In particular, they create challenges when constructing retirement propositions for members. For that reason, we’re likely not going to engage with a new LTAF, though we remain very committed to our existing LTAF. We believe there are better ways to engage with private assets that avoid some of those challenges.”
Natural capital ambitions
Cushon is also ramping up its efforts in the natural capital space. Its LTAF investment in the Schroders Climate+ fund has a 10-25% target allocation to natural capital, which will be deployed in 2025.
Additionally, Cushon is working on a separate natural capital fund, Barnett reveals: “We’ve been working for over a year to design a natural capital fund to invest in carbon-offset-generating assets like reforestation and peatland restoration. We hope to allocate to that fund early next year. It’s a great alignment of long-term pension capital with projects that take time to develop but have the potential for significant impact.”
While many of Cushon’s peers remain sceptical of the carbon credit market, Barnett sees structural drivers that will increase institutional demand: “There’s been backlash against carbon offsets, but it’s important not to lose sight of the fact that every company committing to net zero will need to rely on offsets. If we’re thinking about a 20-year horizon, demand for offsets will be enormous. We’re moving early to capitalise on that demand, as it will only grow over the next few decades.”
Barnett also warns that asset owners should be aware of their indirect exposure to the carbon offset market: “It’s worth noting that pension funds are already exposed to carbon offsets through their investments in large companies with net zero targets like Google and Amazon. If carbon offset prices rise, those companies will have to pay more, which could negatively impact shareholders. Investing in carbon offsets can hedge against that risk.”
From natural capital allocations to climate-focused strategies, Cushon has made climate ambition a priority. However, Barnett’s biggest concern is ensuring the portfolio’s resilience in case of a delayed or failed transition to net zero.
“Our investment strategy is well positioned for a successful transition to net zero. But we can’t discount the possibility of a delayed or failed transition. We’re continually exploring how to ensure our portfolio is resilient in such scenarios, looking at things like vertical farming and climate resilience as investment opportunities,” Barnett concludes.
How are the UK’s master trusts tackling the net zero challenge?
