Pension Funds: Financial and Ethical Investments

David Duguid Excerpts

Wednesday 22nd May 2019 Westminster Hall

[Sir Edward Davey]

I am grateful to the Minister for his intervention. Those new ESG guidelines are helpful, but I am afraid I do not think they are quite up to the scale of the task we face. I will come to that in a second.

We have this carbon bubble; the question is how we are going to deflate it. How will we move from where we are now, with this big risk to our economy, to the low-carbon economy we need? One option is to say, “Well, it will sort itself out. We don’t need to worry now. We can delay it all and it will be all right. We can allow the fossil fuel companies to keep investing in exploring and getting even more fossil fuels, and inflate that bubble even more.” How risky would that be? That is one scenario that some people seem to think is possible. I reject it entirely.

Another approach is to say, “Let’s reduce, and ultimately stop, exploration for further fossil fuels. Let’s not inflate that bubble any more. Let’s gradually deflate it, so we can have an orderly transition for our economy, our energy sector and all the communities, towns, cities and people who depend on it.” That is the solution, and that is why I have concluded that we must disinvest and reinvest in a thoughtful, careful way. If we do that, we can tackle the climate emergency and avoid a financial and economic catastrophe.

That brings me to the Minister’s point. There are three possible approaches to disinvestment and investment. One is what I would call the gentle, market-led approach, which says, “If you have a bit more transparency and disclosure and a few ESG guidelines, it will all take care of itself.” I am in favour of all that stuff, but it is nowhere near up to the task. It is not urgent enough. We have people talking about voluntary disclosure. No, we need mandatory disclosure now, regulated by this House. I applaud the ESG guidelines, but they are a little woolly and poorly defined. They are little nudges when we need more than a nudge, because this is an emergency.

There is a second, state-led approach advocated by at least one Front-Bench team, involving wholesale nationalisation and dismantling capitalism. That would be the wrong approach, because it would delay action and not enable us to take the power of capitalism, with market forces, innovation and competition, to help us solve the problem.

We need to make capitalism our servant, not our master, and that comes from laws and regulations in this House. I propose a five-point plan systematically to decarbonise capitalism and tackle the disinvestment and investment challenge of the pension funds. First, there should be mandatory disclosure from all fossil fuel companies on how much carbon their business plans would see emitted and how much carbon is in their reserves. That should be coupled with a legal requirement to show how they will become compliant with the Paris treaty, with timed targets, so that fossil fuels can unwind the pollution they cause.

Secondly, there should be new climate accountancy rules for accountants and auditors on fossil fuels and pension funds, which would require accountants and auditors to produce Paris-compliant accounts, where assets and activities not aligned with the Paris treaty are written down to zero by 2050 at the latest. I think that would change the valuation of a number of companies. We would see a lot more transparency, really know what was going on, and be able to take better decisions.

Thirdly, there should be new, mandatory requirements on all pension fund managers and trustees to report on whether their portfolios of investments are aligned with Paris or not—really strong transparency and disclosure. Fourthly, there should be new powers for pension regulators, and the Bank of England if required, to challenge funds and other investment operations on their climate risk management. Where that is found wanting, the regulators should be able to take action to ensure proper alignment.

Fifthly, we need to develop a register—probably Government-led—of all the low carbon, green and zero carbon investment opportunities for the capital to go to. We cannot just say disinvest; we must show where investments and that capital should go. The good news is that there are a huge number of very attractive low carbon and zero carbon investment opportunities in this country and around the world, so we can ensure that our pensioners of the future get the pensions that they need and that those pensions are far less risky because they will be based on climate-friendly assets.

[David Duguid (Banff and Buchan) (Con)]

The right hon. Gentleman seems to be advocating a reduction of investment in energy companies. Does he recognise—I am sure he does from his time as Energy Minister—that many such companies, and particularly the larger international oil companies, are investing in new technologies, cleaner technologies and research and development in renewable energy?

[Sir Edward Davey]

I am not trying to get rid of energy companies; I am trying to get them to switch. We have a couple of examples of big energy companies switching out of fossil fuels and into green technology. Some have done that around the world successfully. Unfortunately, most of the majors to which the hon. Gentleman refers have not done so on any serious level at all. I did some calculations that showed on average their capital expenditure on green technology in the last decade or so is just 1.3% of their total spend. That is just not serious. I hear what he says, but we must get those energy companies to take this far more seriously. Some are beginning to shift, but we need to show that they must step up to the plate.

We have a climate emergency, and it is great that we are seeing people—young people in particular—coming out and protesting. I celebrate what they have done. There is a thirst for Governments to take action. The question is: are our actions up to it? The only response to what people are arguing for and what the science says is a quite dramatic systemic change. In the disinvest and reinvest approach and the policies I have outlined, I want to argue for something very radical but practical.

Those who go to the City and talk to pension funds such as Legal & General, Allianz and Axa will find that a number of them are doing what I am talking about. Those who talk to the Governor of the Bank of England, Mark Carney, as I did four weeks ago, will find that he is absolutely on to this case. There is a coalition of willing people in the City who want to go this way; it is just that this Government and Parliament are behind the City and the regulators. We must get in front of them, because they want us to show true leadership. Let us today give that leadership.

--- Later in debate ---

[Patrick Grady]

My hon. Friend is right, and I hope we will hear that point from the Minister.

Difficult decisions will have to be made. The Scottish Government have halted their plans to cut departure tax at airports, and the First Minister said in the Chamber that we will have to look again at our stance on the expansion of Heathrow. Those are the ways that we can begin to make that just transition, and that is the importance of the Divest Parliament pledge, which I and the vast majority of SNP Members have signed and are happy to endorse.

[David Duguid]

Will the hon. Gentleman give way?

[Patrick Grady]

I am conscious of the time, and as the Chair said, we must ensure there is time for the Minister and shadow Minister to respond.

We must lead by example, and starting with our own pension funds is one of the best ways to do that. Like the hon. Member for Bristol West (Thangam Debbonaire), and others, I hope that the trustees are listening to this debate.

It is right to place an emphasis on both the ethical and the financial risks. The ethical risks are there for us all to see. The impact of over-reliance on fossil fuels over the years most affects people in developing countries, whose consumption of fossil fuels has been the least, but who are feeling the impact of climate change first and hardest. As the hon. Member for Somerton and Frome (David Warburton) said, this is not just about financial prudence; there is also a financial logic to switching investments towards clean, green and diversified technologies. Even without a reduction in emissions for reasons of climate change, fossil fuels are a finite resource, and one day they will run out. We must make the transition.

While we still use fossil fuels, we must do so as cleanly as possible. That means investment in things like carbon capture and storage, on which the UK Government have again been woefully lacking. Governments have a responsibility to create a climate-friendly investment environment. The Scottish Government are doing their part with solid environmental and ethical considerations and procurement guidance, as well as the establishment of the Just Transition Commission, which will seize those transition opportunities while ensuring that communities are not left behind as they were during the deindustrialisation of the 1980s.

The UK Government must play their part, and we heard interesting proposals from the right hon. Member for Kingston and Surbiton about aligning decisions to the Paris agreement targets. I suggest that aligning decisions to the sustainable development goals would also make a lot of sense. In reserved areas, the Government should fully operationalise carbon capture technologies and accelerate action to decarbonise the gas grid. They should redesign vehicle and tax incentives to support industry, and commit to adhering to future EU emissions standards, irrespective of our future status within the EU. They should reduce VAT on energy efficiency and home improvements, and support the renewables industry more generally. All that would create a more incentivised investment environment for new, clean and green technologies.

We should listen to the future generations and climate change school protesters. If they wish to claim a pension in a sustainable environment in decades to come, that will require action now to tackle climate change and build a financially viable and sustainable pension fund. For them we must seize this opportunity and look not just at financial and ethical risks, but at the financial and ethical opportunities of a cleaner, greener and more just world.

--- Later in debate ---

[The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)]

This Parliament accepts that there is a climate emergency, and this debate, which I am delighted so many colleagues have embraced this afternoon, has focused on the following key issues: the change that clearly is taking place in our climate; the role of the consumer; the choices that are available to the individual parties that we are dealing with; and, ultimately, the role of capitalism and its ability to assist in addressing these particular problems.

We should trumpet the success of successive Governments of different persuasions, leading up to the coalition and this Government, in leading the way in the G20 and reducing our CO₂, and we should celebrate the quadrupling of our renewable capacity, but we clearly must do more. We should celebrate the fact that, as my hon. Friend the Member for St Ives (Derek Thomas) said, on the May bank holiday Britain had burned no coal for electricity for a week—the longest period without coal since the industrial revolution.

Although we celebrate these good things, they are patently not enough. Although we will plant more forests, recycle more and, crucially, try to engage our consumers, our citizens, our constituents to change their behaviour, we do, I suggest, need capitalism to save the day. I agree with my hon. Friend the Member for Truro and Falmouth (Sarah Newton) that we need to urge local authorities to focus on the clean growth strategy that has been set out by the Government to address the way we do housing and the way we do energy on a localised basis. I believe very strongly—any Conservative will make the case—that capitalism is a force for good, because we need technological innovation to solve the climate change issues, and innovative start-ups will be needed to address the access to capital and the changes that are required.

[David Duguid]

Many hon. Members have spoken about the need for transparency regarding the kinds of companies that are being invested in. Does the Minister agree that that transparency should include the work already done by large oil and gas companies to invest in the innovation he is talking about? It is not only small start-ups that do this innovation; the large companies with large resources behind them are already investing in it heavily. As the right hon. Member for Kingston and Surbiton (Sir Edward Davey) mentioned, the 1.3% invested by the 13 or so companies that are part of the oil and gas climate initiative works out at approximately $100 million a year. That is a very large number, even though the percentage sounds small.

[Guy Opperman]

I accept my hon. Friend’s point. The crucial point is that natural gas had been one of the biggest parts of reducing carbon dioxide in the electricity sector. Hydrogen derived from natural gas will decarbonise heating for homes and transport. The large companies are leading the way on carbon capture and storage. We must work with them to ensure that the successes, which we all want to see, continue.

We can see the changes that are taking place. Individual companies must answer for themselves. Last year, Shell, one of the largest companies that we are debating, agreed to link its executive pay to its carbon emission targets, in direct response to particular shareholders. The Minister for Energy and Clean Growth, my right hon. Friend the Member for Devizes (Claire Perry), would be here if she could, to make the case for the Government’s clean growth strategy and the green agenda. Like her, I urge individual consumers—anybody who has a particular pension—to make the case to their trustees as to how that is being invested.