Pensions: Low-carbon Investments

Lord Harrison Excerpts

Thursday 20th March 2014 Grand Committee

Asked by

[Lord Harrison]

To ask Her Majesty’s Government what steps they are taking to help ensure that pension fund investments support the transition to a low-carbon economy.

[Lord Harrison (Lab)]

My Lords, we save for a pension to give us security in retirement. Climate change is putting that security at risk. It risks the financial performance of our pension funds, it threatens to destabilise the wider economy and it could compromise the quality of life of ordinary pension savers now and in decades to come. As the custodians of our savings for a secure retirement, the investment decisions of pension funds should help guarantee that security by mobilising capital away from fossil fuel extraction, which contributes to climate change, towards low-carbon investment opportunities, which can reduce the climate threat.

In this debate I want to outline the clear steps that the Government might take to facilitate this transition. We must give pension funds a stable policy framework. We must provide explicit legal clarity so that they can consider environmental factors in their decision-making. We must extend the rights of pension savers to know how their funds are addressing the risk that climate change poses to their savings.

In the early months of this year, flooding and severe storms brought misery to communities across southern England and Wales. Thousands despaired as floodwater inundated their homes. Hundreds of thousands spent days and nights without power. Experts at the accountancy firm Deloitte have estimated the clean-up cost of the floods at some £1 billion. The Prime Minister was echoing the concerns of many when he told MPs that he strongly suspected recent extreme weather events to be the result of climate change. The Met Office has warned that the UK should prepare for similar events in the future. The flooding showed how climate change is a real and present concern for ordinary people.

However, millions of those people have a stake in the very system that is helping to drive a potential environmental catastrophe. That skewed financial system must be a central part of the solution. UK pension funds account for some £2 trillion of assets. They invest in the goods and services that make our economy. As long-term investors and custodians of the retirement incomes of millions of ordinary people, they are uniquely placed to understand the climate risk. For those funds, that risk is indeed stark. Under every scenario, the effects of climate change on pension funds could be dramatic. If Governments do not introduce effective regulation to reduce emissions, the value of funds’ investments in fossil fuel companies and other high-carbon assets could collapse.

If climate change is allowed to advance unchecked, the effects of extreme weather and the growing volatility of food and fuel prices are likely to hit returns across entire portfolios. The noble Lord, Lord Stern, has estimated that if we fail to act, the total cost of climate change could be as much as 20% of global GDP. Climate change could also create economic and social instability, affecting the spending power of future pensioners and their broader well-being in retirement. Pension funds have a duty to act in the best interests of savers. Given the risk posed by climate change, they should seek to understand the investment implications. By reducing their exposure to high-carbon assets and by taking advantage of opportunities in the green economy, pension funds could help to guarantee the future security and prosperity of themselves and their beneficiaries, and hedge against that climate threat.

Certain barriers mean that this transition is not yet happening. The Government can remove those barriers. Pension funds often perceive low-carbon investments as risky and a significant reason for this is the confusion, and sometimes the infighting, that characterises government policy on tackling climate change. It makes investors uncertain when comments attributed to the Prime Minister describe green levies as “green crap”; it makes investors uncertain when the Treasury delivers a Budget where oil and gas explorers are given a £3 billion tax break to encourage drilling; and it makes investors uncertain when fossil fuel subsidies outweigh those for green technologies. In other words, at present, Governments are not only failing to do enough to promote green investments, they are actively keeping those investments uncompetitive by subsidising high-carbon alternatives.

Where there is currently uncertainty, the Government must provide stability and leadership. To remove this barrier to prosperity and to unlock a potential investment success story, they must make an iron-clad and cross-departmental commitment to catalyse the low-carbon transition. This means phasing out subsidies for fossil fuels and making an active and systematic commitment to developing and commercialising green technologies. As the Commons Environmental Audit Committee found, giving full borrowing powers to the Green Investment Bank by next year would decisively boost green investment and create jobs. That means putting low-carbon solutions at the heart of government plans for infrastructure and industrial strategy.

The type of infrastructure we build now will critically affect our ability to meet our carbon reduction targets in the future, so initiatives like the pensions infrastructure platform should demonstrate a clear direction of travel. As well as having low-risk opportunities to invest in the green economy, the law must allow pension funds to consider the wider benefits of those investments. The ShareAction charity has found that many pension fund trustees feel unable to take account of social and environmental factors such as climate change when making investment decisions. They often interpret their duty to act in the members’ best interests as a narrow requirement to maximise short-term gains.

Although the Law Commission recently stated that there was “no reason” for funds not to use environmental considerations, this position is often not reflected in practice. Investors need clarity and the Government can provide that by clarifying in statute that pension funds are not legally obliged to chase short-term profits at the expense of wider considerations. Will the Minister respond to that?

Savers’ security in retirement depends on how their funds address climate risk and the law should encourage them to take a broad and enlightened view of their members’ interests. Just as the Companies Act encourages directors to take account of environmental considerations and other wider factors in pursuing the success of their company, such a measure for pension funds would enable trustees to focus on long-term, sustainable wealth creation. Again, will the Minister respond to that?

To assess the risks of climate change, pension funds must also have access to high-quality information about the companies that they invest in. The introduction of mandatory greenhouse gas emissions reporting is welcome but this reporting must cover the full extent of a company’s activities and to be useful to investors, that reporting must be objective, reliable and readable. Is the Minister satisfied that the reports produced at the moment achieve the target of giving proper and measured information?

Will the Minister state clearly today that facilitating the transition to a low-carbon economy provides real business opportunities, especially to small businesses? Katja Hall, the chief policy director of the CBI, said this month:

“The UK’s low-carbon transition is already driving jobs and investment. Our green market stands at £120bn and has been growing throughout”,

the recession.

I conclude by saying this regarding the European Union. Criticism was made today by the Chancellor of the carbon trading scheme but if we could engage with our European Union friends on important issues such as the environment, the Prime Minister might be satisfied with a renegotiation which is positive in the way that it approaches these important matters, which affect pension funds and people’s prosperity.