Pensions: Low-carbon Investments

Lord Whitty Excerpts

Thursday 20th March 2014 Grand Committee

[Lord Whitty (Lab)]

My Lords, I start by thanking my noble friend Lord Harrison for initiating this debate. I agree with every word that he said but that will not stop me saying the same thing in my own words. I declare a past interest as the chair of a public sector pension fund. That was at the Environment Agency and I will mention some of my experience there later on. However, I will start by focusing on the size of the problem.

As we all know—or as most of us accept—the world needs to reduce drastically its carbon emissions and greenhouse gases but, frankly, we are not doing at all well. The IPCC’s fifth assessment spells out that we are on course to exceed by some margin the safe level of a 2% rise in global temperatures, which is not that safe. I will take the measure of carbon intensity because the Americans like that better than some of the other targets. Between now and 2030, we need to reduce our carbon intensity globally by an average of 5% per year. The reality is that in the last five years, which were during a world recession, the carbon ratio fell by only 0.7% per annum so the world is well short of where we need to be. In fact it is the US that has done best, largely by substituting shale gas for coal, but in the emerging economies carbon intensity has actually increased by 5% and most western economies, including our own, have not done very well either. We increased our carbon intensity by 2.6% in the last reported year, which was to 2012, and the world as a whole did so by more than 2%.

As we are, we hope, coming out of recession we would expect the pressure and therefore the carbon intensity to increase rather than decrease. It is therefore a growing problem and to attempt to turn that round needs massive investment in greener technology: from the sources of energy right through to the appliances we use in our homes and on our roads, and from nuclear energy to how you power your own scooter or small car. Investment in those technologies can come from only three sources. The first is the state—as we know, states in most of the world are running through a period of austerity and shortage of funds. The second is the balance sheets of existing companies—we know that quite a lot of money is sloshing around on the balance sheets of many major companies. Unfortunately, that does not include European energy companies, whose balance sheets are not in a great state. We are therefore unlikely to see huge investment coming from that. It will therefore have to come, thirdly, from the markets. We know also that a large chunk of market investment nationally and internationally is deployed by people who, quite contrary to what my noble friend Lord Harrison was seeking, look very much at the short term. Many of the hedge funds and other investor funds around the world are not really likely to invest in technology which has a long-term return.

Pension funds on the other hand are by definition there for the long haul. While there has been a decline in certain types of the better pension funds, they are still deploying vast resources. The people who are dependent on pension funds have to take a long view of the benefit from them. People who are contributing now, in their 20s, to pension funds of all sorts could be receiving, or their dependants could be receiving, benefits relating to that contribution in 80 years’ time, well beyond the targets for the reduction in greenhouse gases.

There should therefore be some synergy between the decision-making of the pension funds and the need to divert investment away from high-carbon energy and high-carbon usage into greener technologies. Unfortunately, there are two problems with that. There is the culture of the pension fund sector on the one hand and there is the unreliability of Governments of all sorts in acting to facilitate this on the other.

On the culture of pension funds, they are risk averse, but they define risk in very conventional terms. They are a bit set in their ways; they are a bit traditional and slow to move. That applies to the trustees of most pension funds, who, as my noble friend said, tend to interpret their fiduciary duty in a rather short-term and narrow way; it applies to the administrators of those funds; it applies to the advisers to those funds, who tend to look at things in stock market terms and seek a relatively short-term return when they choose which equities, bonds or markets around the world they should invest in. It applies also to the actuaries, who have pretty substantial powers in telling funds whether they are viable—indeed, some of the regulations relating to that are pretty constraining of pension funds in terms of assessing their solvency. Actuaries are even more conservative—with a small “c”, I hasten to add—than the pension fund professionals. It applies also to the fund managers who are contracted by pension funds. They tend not to see long-term investment which has some risk as being an area for their investment—yet the greatest risk of all to everybody’s investment is climate change and the drastic effects that it could have on all sorts of investment and all sorts of property. It should therefore be logical that investment policies should be seen through the prism of how they are affected, or likely to be affected, by climate change.

Some pension funds are beginning to do this. It does not mean overturning everything that pension funds do; it means seeing everything through a prism. In investment in equities, it means looking at the type of activities that companies are engaged in; in government bonds, it means looking at the type of view that Governments take; and in particular projects or ownership of property or land, it means looking at agriculture or forestry that is on the greener end of activity. In the Environment Agency, we tried to do that, for everything from our own decisions and right through. It did not mean that we had a completely abnormal range of portfolios; it just meant that some companies were not invested in while others, which were giving a bigger return and some seriously green advantage, were. It is not rocket science for pension professionals to take on that role, and we should do so in all our operations. There needs to be a concerted effort to try to change the culture of the pension fund professionals and those who advise them. It is beginning. One of the papers circulated to us was the Green Light Report, which makes a number of very important suggestions as to how pension funds can conduct themselves. I do not have time to read them out.

The other constraint is Governments. There are some opportunities for Governments here, and some downsides. Two years ago the Chancellor called together some of the major pension funds to try to get them to invest more in infrastructure. I do not know the degree to which there was a green dimension to that, but there could have been. He was thinking of delivering £5 billion of investment almost immediately. I am not sure how well that went but there needs to be some consideration of using that model to bring together the big pension funds and point them towards greater investment in greener technology and low-carbon areas.

Of course, the regulatory framework is also a serious issue. Successive Governments have changed the regulatory framework both for pension funds and the development of green technologies. Just this week we have seen the Budget change rules in relation to money purchase pension funds, which will seriously destabilise investment in insurance companies and annuity providers. We had changes even yesterday in relation to the carbon floor price and therefore the way in which we see a return to green investment. We have a whole history of this—under both Governments, one has to say—with FITs and ROCs changing the rates. We cannot have a regulatory framework for the long term which changes every year, yet the past few years have seen serious changes. My plea to the Government is: let us have some stability and consistency, in relation to both pensions regulation and regulation supporting green technology.

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[Lord Whitty]

The Chancellor said he was bringing together the large pension funds to look at their investment in infrastructure.

[Baroness Verma]

My Lords, I am told that I have two minutes. We have made progress. A £500 million fund to be managed by Dalmore Capital will, hopefully, be unveiled and be available. I think that is the fund the noble Lord is referring to, but I will read Hansard and make sure.

The noble Lord, Lord Whitty, also mentioned the carbon floor price. We have to establish a price that sends a credible signal to help drive billions of pounds of investment in low carbon energy generation. However, we also have to put it against what is happening with our partners and member states. We cannot let our industries be at a disadvantage because we have not been able to reduce the burdens on our energy-intensive industries.

I have been told that I need to sit down very soon, but I would like quickly to touch on the reference made to the Green Deal by the noble Lord, Lord Grantchester. I remind the noble Lord, over and over again, that this is a very long-term programme. We did not come in singing it with bells and drums, but it has seen significant measures being put in place. We have seen over 500,000 measures installed under ECO. The noble Lord must be aware that some may have used the Green Deal bank but others may have their own finance.