Pensions: Low-carbon Investments

Lord Giddens Excerpts

Thursday 20th March 2014 Grand Committee

[Lord Giddens (Lab)]

My Lords, I congratulate my noble friend Lord Harrison on having initiated this debate, in which there seem to be as many chiefs as Indians, which is a bit of a shame. I have spent the past seven years of my life studying climate change, and I would like to take a somewhat more global view than speakers have taken so far, as climate change is quintessentially a global issue.

Not only in this country but across the world, pension funds occupy a peculiarly strategic position within the wider framework of financial markets. They are by definition long-term investors responsible for a far longer investment cycle than the vast majority of other funds. In a world of the immediate, pension funds are obliged to consider the long-term future. Following my noble friend Lord Whitty, that does not mean that they always do so in practice, but in principle they are obliged to do so. Generating a stable set of returns for 20, 30 or 40 years down the line implies having a broad set of ethical imperatives—in other words, the obligation to create stability through their investment decisions; to produce stability rather than just endorse it. I take it that that is really the theme of this debate as a whole.

Sustainability is all about enhancing such stability in a world that is creating huge problems of resource management for its future. In the European Union, pension investments amount to about €8.7 trillion, a gigantic sum of money. About half of that is professionally managed assets within Europe, the rest is public money. It makes complete sense to argue that sustainability—seeking to limit climate change in particular—should be brought to the forefront of pension fund investment. It is in principle a win-win situation as, as other speakers have said, if we are unable to limit the advance of climate change—increasing weather volatility and other changing climatic patterns—we will intrude on that very process of providing security for today’s younger people that it is the object of pension funds to generate.

The framework of emissions reductions set out in the EU’s 2020 programme and beyond provides plenty of inducements for pension funds to invest and, indeed, guarantees a level of long-term protection for that investment. It will be interesting to hear what the Minister thinks of the existing state of affairs within EU countries on that issue, not just in the UK. A number of substantial investments of pension funds have been made in, for example, Germany, Austria and Denmark with regard to environmental imperatives. Most of those, as one would expect, are from public pension funds. However, some more corporate models are emerging. They are interesting and should be studied here. Notable examples I would mention are the Nysted wind farm in Denmark and the proposed Anholt wind farm in the same country. In those cases, the pension fund and the industrial partners collaborate to share both risk and reward, and that would certainly be a viable model here. Denmark, as we know, is considerably in advance of the UK on many of these issues.

In this country, the Green Light Report does what its name indicates: it analyses how pension funds can safely and profitably enter that new territory. The report has a range of comments on the issue that my noble friend Lord Whitty raised. It seems a sensible document and contains a whole series of possible strategies.

I should like to ask the Minister three basic questions. One is simply to follow up on the speeches that have been made so far. It is obvious that public policy will play a key role in ensuring a greater connection between pension funds, sustainability and the limitation of climate change more specifically. What interventions are needed on the level of shareholding law to provide a platform for such long-term investment? Where is our existing legislation inadequate and how might it be improved?

Secondly, does the noble Baroness agree that there should be impartiality between younger and older savers in respect of pension funds and their output for environmental imperatives? That has brooked very large in some European countries, because it helps to structure the nature of the investments made. If the noble Baroness does agree, how can public policy help ensure that this is so?

On my third point, I differ significantly from the noble Baroness, Lady Jones, and from her contributions to the debate on shale gas earlier this week. I call myself an ungreen green: the prime issue facing the world is reduction in global carbon emissions, which overrides most other imperatives, although it does not eliminate them altogether. We have a lot of work to do on this compared to the United States. This has come, not so much from the report discussed on Monday, but from the Breakthrough Institute. This environmental organisation has shown, definitively, that over the past several years the US has reduced its carbon emissions to a greater degree than almost any other country. It has done so because the advent of shale gas has allowed the widespread closure of coal-fired power stations which, as everyone acknowledges, are the most lethal source of CO₂ emissions.

Does the Minister agree with this analysis which, as was discussed on Monday, is resonant with implications? Does she agree that pension funds should, subject to strict and responsible environmental regulation, treat shale gas as an effective environmental investment, so long as some of the core issues—especially curbing emissions of methane—are effectively handled? As was said in the report discussed on Monday, this is important because it is relevant, not just to this country, but to the core issues of climate change. The US and China contribute some 42% of total global CO₂ emissions. If we cannot effect a change, especially in China, we are not big enough to make a significant dent in this global issue. Shale gas can play an important role, alongside renewable energy, if it is used analogously to how it has been used in the United States.

This has been a worthwhile debate which can have practical consequences. We in the UK should not be too parochial about it. We should recognise its global significance and actively look at best practice in other countries—in the EU and elsewhere in the world—which have deployed pension funds in conjunction with industrial partners. In doing so, they have secured a breakthrough in showing that corporate capital can be harnessed to long-term environmental objectives.

--- Later in debate ---

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)]

My Lords, I thank the noble Lord, Lord Harrison, for opening this debate and all noble Lords who have contributed. This important debate allows me to lay out what the Government are doing to ensure that we have in place an environment of certainty for long-term investment. Above all, we must strive for certainty for low-carbon energy policy, a certainty which allows all investors and pension investors in particular to fund energy infrastructure. The current low-carbon investment regime provides this certainty, which, in February this year, led to the manager of a pension fund owned by the state of Quebec acquiring a 25% stake in the 630-megawatt London Array offshore wind farm for £644 million.

There have been several other major pension investments in solar PV projects supported by the small-scale FIT scheme, notably by Aviva insurance. PensionDanmark has also made a number of UK investments in renewable obligation-backed projects. As we complete the much needed reforms to the energy market, we need to ensure that policy stability sustains and investments continue at pace.

The central ask of the pension community is long-dated, index-linked products which deliver stable returns from assets that are well understood and low-risk. Pension companies are not looking for a fast buck; when they invest they are in for the long haul. Our new contracts for difference are private law, long-term contracts which seek to remove the volatility risk associated with the wholesale energy market. The returns from these contracts will be index linked to ensure investments retain their real value.

We have also provided a back-up route to market through our off-taker of last resort provisions. This further reduces risks for debt and equity providers, and improves competition and liquidity in the power purchase agreement market. The transition from the renewable obligation to contracts for difference is being taken forward in a structured manner and our reforms will ensure that our targets are hit at the lowest possible cost to the taxpayer.

The Government have three objectives for energy policy: to keep the lights on, to keep energy bills affordable and to deliver our climate change goals. To achieve the necessary change, I was privileged to lead the Energy Bill through this House, and the Energy Act 2013 is now law. The Act provides the legal and financial mechanisms necessary to attract the investment that we need and at the right price—investment which could support up to 250,000 low-carbon jobs by 2020.

Noble Lords have raised a number of questions and points. I shall try to answer as many of them as I can. Where I feel that colleagues in other departments may offer greater detail, I will ask them to write to the Committee.

To the noble Lord, Lord Giddens, I say that I am pleased to be chief and extremely proud to be an Indian—so that ticks both of the noble Lord’s boxes. I turn to the more important points. The noble Lord, Lord Grantchester, touched on a range of issues which I think were covered in my speaking notes, but I remind him that the EMR, the biggest reform of the electricity market since privatisation, was done under this Government. We wanted to provide investors, particularly in the renewable, low-carbon sector, with long-term certainty. The previous Government, of whom the noble Lord was a supporter, had 13 years during which they knew that 20% of current electricity power generation would come off grid by 2020. They failed to address that issue and we must now, sadly, play catch-up in a range of areas. We have to accept that there are issues at stake.

To the noble Baroness, Lady Jones, I say, yes, of course, we all sign up to individual responsibility. This Government and the party opposite had complete consensus when we worked through the Climate Change Act 2008 to ensure that we as a country set standards and examples for the world to follow. However, we cannot do it at any cost; we have to see how it impacts on consumer bills. The noble Baroness gives a deep sigh, but I say to her that, when you are in government, you have to take a whole load of decisions. Some of those decisions may not be taken as quickly as we would like, but they have to incorporate consideration of their economic impact on all our consumers, not just a small section of them.

We will remain on track to being the greenest Government ever—that was a promise and a pledge that we made and the Prime Minister has reiterated it. We have through the Treasury set a levy control framework of £7.6 billion up to 2020. So I do not think that there is any lack of ambition on the part of this Government to deliver on low carbon if they are putting in that sort of up-front surety and investment.

Some of the more detailed points raised by the noble Lord, Lord Whitty, around pension funds will need to be responded to by other colleagues in more detail. I will ensure that the appropriate colleagues receive a note from me after this debate.

The noble Lords, Lord Whitty and Lord Giddens, mentioned other countries. I am pleased that China has taken some very big steps towards addressing its carbon emissions. We are seeing great progress in its building of offshore wind—it is building more offshore wind capacity than any other country. It has recently created its own renewable feed-in tariff for solar. Its manufacturing sector has significant wind turbine and solar companies. It is also investing heavily in new nuclear.

I turn to India. I read an article very recently on advice it took from us at DECC on the 2050 calculator. It has incorporated the 2047 calculator to see how it can address issues of introducing more renewable energy.

[Lord Giddens]

Would the noble Baroness agree that there is a massive possibility in China for the development of pension funds in relation to environmental issues? There are no pension funds in China: it is families who save. The country has to build a welfare system from the beginning and therefore, at least in principle, has the opportunity to circumvent some of the difficulties we find in western countries.

[Baroness Verma]

The noble Lord raises a very important point. We should be actively having this sort of discussion with all our global partners.

Since 2010, this country has seen £35 billion of investment in the renewable sector and there is £20 billion more in the pipeline. I would dispute with anyone who says that investment is not coming here. The noble Lord, Lord Grantchester, thinks we are not attracting investment. We have attracted more investment than did the noble Lord’s party when it was in government. It is not a competition. The noble Lord, Lord Boateng, did not speak in the debate but he may shake his head. We have significant investment coming through, with new nuclear as well as the renewable sector. We should be proud of being a country that people want to invest in and of offering an environment that enables the investment to come in.

I am always mindful of time. The noble Lord, Lord Whitty, also mentioned the National Association of Pension Funds—I think that it was the discussion around a national pension fund that the Treasury may have raised in 2011.