Pensions: Low-carbon Investments

Lord Grantchester Excerpts

Thursday 20th March 2014 Grand Committee

[Lord Grantchester (Lab)]

My Lords, I, too, thank my noble friend Lord Harrison for initiating this debate and for his stimulating opening remarks.

Since the passing of the Climate Change Act, there has been no denying the size of the task before us, as my noble friend Lord Whitty said. In the past decade, wind and other renewables have grown to the extent that they now provide about 10% of UK generating capacity, with nuclear power generating 16% of electricity. Therefore, a quarter of electricity generation is now low-carbon. That highlights that there is still a long way to go. There is also no denying that it must be government that takes the lead, prepared to pump-prime heavy initial costs and to set the investment framework to ensure that the necessary funding is forthcoming.

Buildings emissions have fallen by 18% but transport emissions have made little progress and are about the same as they were in 1990. There is concern that carbon budgets will be challenging, to say the least, especially as a large element of the reduction in emissions has been due more to the recent economic downturn than to constructive initiatives. Instead of bringing forward increasing investment, this Government have unsettled confidence and overseen decreasing activity. Investment in green energy has fallen to a four-year low, from £7.5 billion in 2009 to £5.3 billion in 2013. Bloomberg figures for asset finance excluding small-scale development show investment falling from £7.2 billion to less than £3 billion and, worse, heading to less than £2 billion.

All speakers today have recognised the contribution that pension funds can make to building a low-carbon economy. There is a green finance gap, with investments currently running at less than half the level needed to deliver the decarbonisation needed to meet emission reduction targets. Pension funds are able to look at the long term for returns, even if they must also have a keen eye on cash generation to meet ongoing pension commitments. Green projects on sustainable energy sources and clean technology include multiple technologies at different stages of development and lengths of maturity. Pension funds have a wide range of investments available, such as equity, infrastructure funds and now green bonds, which are rapidly gaining interest as an asset class.

However, pension funds’ investment in green measures remains very low, at about 1%. The noble Baroness, Lady Jones, highlighted that pension funds have a long way to go regarding the ethical parameters to their operations and investments, but investors will not invest simply because it is green. Many green investments are currently uncompetitive because they involve developing new technologies and have to reach a scale to enable them to become commercialised. Investments usually bear high liquidity and volatility risks and are therefore suitable only for dedicated and sophisticated funds.

A further barrier is the perceived political risk, which is especially heightened internationally, where fossil fuel subsidies often outweigh those for green technologies, thereby keeping green investments uncompetitive. My noble friend Lord Giddens set out the global challenges to long-term security and the international challenges to investor law regarding best practice. It should also be recognised that there is often a lack of expertise and appropriate knowledge among the pension funds.

Government policies are vital to support the commercialisation of new technologies. First, government policies must be consistent, stable and maintained long enough to enable the long planning and gestation periods to mature. Investors need clarity on the development of regulatory decisions, timing and future direction, as my noble friend Lord Whitty said.

Government can encourage business and environmental footprint reporting. On companies’ annual reports and accounts, the Government have introduced regulations to include the requirement to provide information on the company’s environmental impact and how this will affect the performance and development of the company. New carbon reporting for companies could help investors understand carbon impacts and stimulate greater focus on these issues among customers and suppliers, in order to add pressure on companies to adopt more sustainable practices. This work needs to be developed further.

As my noble friend Lord Harrison highlighted in his remarks, ShareAction has questioned whether the duties on directors and trustees to consider acknowledging and thereby mitigating climate change are robust enough. Nevertheless, it is important that companies and funds factor those risks into their decision-making and consider the climate impacts of investments as part of their wider social and environmental audit and risk assessments.

Green infrastructure funds are also likely to be an important way for pension funds to pool resources and invest in a portfolio of green projects. In that regard, the establishment of the Green Investment Bank has been vital in using public money alongside the private sector. However, the Government must show clear determination to follow through policies with cross-departmental commitments. Although this Government have a dislike for targets, such targets could nevertheless demonstrate the Government’s commitment to make things happen and underline where corrective action may become necessary.

At the end of our debate on the statutory instruments to implement the Green Deal, I asked the Minister if she would share what success might look like on this very important initiative to enhance the energy efficiency of our homes. Although she would not commit to a figure, the Minister in the other place said that he would be having “sleepless nights” if fewer than 10,000 people had not signed up to the Green Deal within its first year. Just 1,221 households have signed up and only 746 measures have been installed.

Although it is good that the Green Investment Bank has provided funding for the Green Deal and its energy efficiency schemes, does the noble Baroness agree that the scheme urgently needs to be reviewed, especially in regard to the interest rates levied, and undertake corrective action? It is most important that the Government provide clear and consistent environmental policies which will fix market failures and give institutional investors the confidence to invest in green projects. Without these policies, climate finance from pension funds will not be forthcoming and we will all be having sleepless nights.