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UK minister ups the ante on pension funds and climate change

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The UK pensions minister took the opportunity of London Climate Action Week to reinforce his views that the country’s pension funds both can and must play a role in “tackling climate change”.

Addressing delegates at an event on Monday, Guy Opperman suggested pension fund trustees holding oil and gas securities may be doing so because they doubted the government’s commitment to emissions reductions – and they would be wrong to do so.

“Perhaps they suspect that governments aren’t serious, that we won’t meet our targets and that we’ll carry on with large net carbon emissions to 2100 and beyond,” he said. The consequences of that, however, would be “dismal”, he added.

“There absolutely is the political will to address this climate emergency from both the government and all the opposition parties,” Opperman continued. “If those of you in the room ever doubted your individual or collective power, I encourage you to realise it now.

“This legislation commits the UK to a path that pension funds must play a massive role in.”

Last week the UK became the first major economy to adopt a law to end its contribution to global warming by 2050.

According to Mike Thompson, head of carbon budgets at the Committee on Climate Change (CCC), which recommended the government adopt the target, the Climate Change Act “is probably the strongest piece of climate legislation in the world”.

Guy Opperman MP

“There absolutely is the political will to address this climate emergency from both the government and all the opposition parties”

Guy Opperman, minister for pensions and financial inclusion

“It doesn’t let you just set the target, it requires that once you set the target you set a pathway to get there and you put in place the policies in order to deliver it,” he said at another London Climate Action Week event.

“It is now law that the secretary of state for energy must bring forward a policy package in order to meet the net-zero target. This is not just some wishy-washy goal.”

The driving force of regulation

During his speech on Monday, Opperman also highlighted new and proposed regulation affecting pension schemes. He said: “I don’t want to hear any more that ‘climate change is important, but we leave it to our investment managers’.”

Pension funds’ statements of investment principles had for “too long… been formulaic, generic and detached”, he said, adding that he intended to use transparency to change this.

Under new regulations adopted this year, defined contribution (DC) schemes have to publish their investment policies and report on them annually.

Opperman also said the legislation he had introduced to transpose the updated Shareholder Rights Directive also obliged defined benefit schemes to publish their policies on climate change.

UK parliament

The UK has brought forward some of the most ambitious global warming targets in Europe, according to commentators

“Many defined benefit schemes are de-risked, but the £1.5trn [€1.65trn] of assets means even small percentage allocations have a significant impact on where investment is directed,” he said.

Opperman also brought up government proposals for larger DC schemes to disclose and report on a “clear” policy on infrastructure investment and other illiquid assets, saying he was considering the next steps “and would personally like to go much further”. The proposals were unveiled in February, with a consultation running until the beginning April.

Opperman also highlighted new governance regulations “that require trustees both to have an effective system of governance, including consideration of [ESG]; and to document how they assess risks from climate change and risks from the low carbon transition”.

The UK government this week published its green finance strategy, which revealed that, together with The Pensions Regulator, it had set up a working group to produce guidance for pension schemes about carrying out and reporting a climate risk assessment, with a view to this feeding into a governance code with “statutory footing”.

“I take this very seriously,” said the minister, “and I am very aware of the consequences on not addressing the long-term climate emergency. I hope you look in the mirror and look at what role you can play.”

Helping pension funds to help

According to the organisers of the event – Sustineri, Pensions for Purpose and Accounting for Sustainability – Opperman and other policymakers in attendance also heard from pension funds about what would help them to deliver on climate goals.

The event was held under Chatham House rules, but according to a report by the co-hosts, one of the main discussion points was that investors needed a more joined-up approach across government and regulatory regimes. The need for a coherent renewables policy and stronger carbon pricing was mentioned.

Factory

Credit: Ralf Vetterle

Addressing the UK’s carbon output ‘will require a shift in policymaking’

According to the CCC’s Thompson, the government’s approach to climate change was “far too siloed” and that a “pretty fundamental shift” was required in the approach to policymaking.

“We’ve got too many departments… who just haven’t made the progress that we need,” he said. “This has to be owned by the new prime minister [and] the chancellor. They have to be corralling all the secretaries of state to put this front and centre of policymaking in every department.

“All the major decisions that are made are going to have to go through a net-zero filter if we’re going to get to this target.”

Fossil fuel divestment

Neatly bookending London Climate Action Week, two royal institutions today announced divestment of shares in fossil fuel companies. The Royal College of Emergency Medicine cut the investments from its £1.3m endowment fund, according to a statement, and the Royal Society of Arts did the same for its £17m portfolio.

Yesterday the National Trust, a conservation charity, announced it would sell out of all fossil fuel companies over the next three years in its investment funds, in addition to increasing engagement with asset managers to encourage them to improve their environmental performance, and seeking out opportunities to support green start-up businesses.

Wimpole Hall, Cambridgeshire

Credit: © National Trust Images/Andrew Butler

A National Trust site in Cambridgeshire, England

Peter Vermeulen, National Trust’s chief financial officer said: “Many organisations have been working hard to persuade fossil fuel companies to invest in green alternatives. These companies have made insufficient progress and now we have decided to divest from fossil fuel companies.”

Shirley Rodrigues, deputy mayor of London for environment and energy, welcomed the organisations’ decisions.

“London is the global hub of the divestment movement and it is vitally important to divest pension funds from fossil fuels to help address our climate emergency,” she added.

There is a big debate about whether divestment or engagement with companies is the best way to effect change. In a recent report, UBS Asset Management said the threat of divestment, together with shareholder votes, were “direct and powerful tools that can be used to put pressure on corporations because they place incentives at the heart of their raison d’être – generating value for shareholders”. 

Legal & General Investment Management recently announced it would cut ExxonMobil from its Future World funds as part of its “engagement with consequences” programme, while the Church of England has set a deadline of 2023 for its engagement programme with fossil fuel companies.

Earlier this week a trio of senior figures working for UK occupational pension schemes signed a pledge to recommend to their boards and investment committees to “insist” on asset managers actively engaging with corporate boards to disclose a clear business plan to transition to a low carbon future.

Earlier this year, more than 300 investors backing Climate Action 100+ were urged to adopt “a consistent, outcomes-focused and transparent escalation process” for their engagement with companies.

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