Pension Funds: Financial and Ethical Investments

Alan Whitehead Excerpts

Wednesday 22nd May 2019 Westminster Hall

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I congratulate the right hon. Member for Kingston and Surbiton (Sir Edward Davey) on securing this debate. I think he slightly understated the carbon bubble in his opening remarks. The carbon bubble—basically the evaluation of assets that we know will never be realised—is not something that might burst in the not too distant future. It will inevitably burst because energy companies have systematically overvalued their assets and put them on their balance sheets. Not only will the historical overvaluing be in question, but all the valuing for the future will be in question, basically in line with where we now know we have got to go on net zero in our economies.

I prefer to call the carbon bubble a carbon boil. I am afraid the image is rather poor, but what we can do with a boil is lance it before it bursts, and that is the exercise we should be engaged in right now. The suggestions that the right hon. Member for Kingston and Surbiton put forward for doing that were sound. However, pension funds are complicit in the carbon boil/bubble because, by and large, they consider their fiduciary duty to be about getting the best for their pensioners over the next few years. They do not generally look at the long term, and do not think they are required to do so as far as their funds are concerned. The Governor of the Bank of England recently described it as

“the tragedy of the horizon”.

[Richard Graham]

To reassure the hon. Gentleman and others, it is perfectly possible for pension fund trustees to take the view that their fiduciary duty of obtaining good returns to deliver the pensions expected is not incompatible with taking into account huge amounts of other issues, including climate change. It is important that we all recognise that. We have a duty to look at that as well.

[Dr Whitehead]

I agree with the hon. Gentleman that some pension funds are beginning to take a different view. Indeed, that different view is becoming more possible, but the general consideration of the fiduciary duty remains a short-term gain for pensioners in the funds. Of course, the people setting out on their working lives will not get the benefit of those pension funds for 30 or 40 years. During that time inevitably we have to move to the net zero carbon economy. It is therefore essential that pension funds have a duty to look at the long term.

[Guy Opperman]

I want to help the hon. Gentleman on one point. He needs to understand that the ESG regulations are not voluntary, as the right hon. Member for Kingston and Surbiton (Sir Edward Davey) suggested. They are mandatory. If the trustees fail to follow them, specific sanctions follow.

[Dr Whitehead]

My understanding of the 2018 regulations is that it is mandatory for people to look at such things, but not mandatory for people to do things. That is the difference. In fact, I welcomed the regulations.

Pension funds should in future have a duty to protect the long-term value of the funds as well as consider the short-term issues of making money for their pensioners. We therefore need to clarify in law the fact that pension funds have a duty to protect the long-term value of the funds. Indeed, a recommendation that the Environmental Audit Committee made in its 2018 report has not been acted on, even though those regulations were introduced. That is something we need to move to urgently.

Having said that pension funds tend to invest in bonds and various other things that are primarily about energy bonds, on the assumption that there will be value, which we know will not be there in future, there is then the question of moving towards investment in things that do make a difference to climate change. Pension funds have a genuine problem in terms of the Solvency II regs, which tend to guide pension funds away from investing in the schemes that are capital-intensive up front and revenue less intensive behind, that are at the heart of the green investment revolution.

We need to do two things: first, make it much easier for pension funds to invest in long-term schemes, and secondly, ensure that they have a duty to ensure that they do not invest in short-term schemes. I have addressed the practical aspects of what pension schemes have done. I have not touched on the moral aspect. We simply have to leave dirty energy in the ground. We have got to invest in clean energy for the future, and pension funds ought to be at the front of that. If pension managers take that view in addition to the legal responsibilities that they have, I am sure they will go a long way to helping the green revolution succeed.

[Several hon. Members rose—]