The UK pensions industry could invest up to £1.2trn in climate solutions with the right reforms, according to research from Phoenix Group and Make My Money Matter.
The two firms partnered up to explore the role the pensions industry can play in financing the UK’s path to net zero as well as supporting developing countries in financing their transition.
The duo has produced a report – Unlocking investment in climate solutions – that considers the current policy, market and regulatory barriers and outlines how government, regulators and industry can collaborate to overcome these.
The report found that, with the right reforms on the right terms for pension savers, UK pension funds could quadruple their investment in UK climate solutions to up to £1.2trn of their UK asset allocation.
If unlocked, the £1.2trn investment would account for half of the gross capital investment in climate solutions needed by 2035 for the UK to remain on track with its net zero transition, the report stated.
It added that in contrast, today only £100bn of the UK pension industry’s assets are invested in UK climate solutions such as offshore wind, solar and energy-efficient housing. If current trends continue, without further actions, that will rise up to £300bn between now and 2035, it said.
However, while there is an appetite across the UK pension industry to scale up investment in climate solutions, the report highlights that many are currently struggling to match their ambition with action due to a range of policy and regulatory barriers which affect both demand for finance and the supply of finance.
These barriers, it said, limit the sector’s ability to invest in ways that deliver customer value and align with fiduciary duty.
The report identified seven strategies that can help mitigate the barriers to investment. To address the demand for finance it suggests developing a UK climate transition plan with sector-specific strategies and a clear roadmap outlining consistent planning to allow the regime to prioritise the go-to-market and scale climate solution projects.
To address the supply of financing, the reports calls on the UK government to provide clarity on considering climate impact as part of fiduciary duties and to deliver matching adjustment reforms with guardrails linked to productive and sustainable finance.
The report also outlines short-term actions the pensions industry can and already is undertaking to mobilise more capital into climate solutions, including aligning disclosures with the Transition Plan Taskforce (TPT) standard, developing new products and business models and advocating for broader system change.
Bruno Gardner, head of climate change and nature at Phoenix Group, said: “It’s exciting to see that pension funds could finance up to half of the investment needed to keep the UK’s transition on track and provide savers with greater access to the investment potential of climate solutions, but it’s even more important to have identified why there isn’t already more funding for climate solutions and what can be done about it.”
He said the research will help start “much needed” conversations with government, regulators and the rest of the industry to collectively help pension funds fulfil their potential in the nation’s journey to net zero.
“By setting out the scale of the opportunity, we hope to show that by creating a pipeline of investable opportunities and by making it easier to invest in climate solutions we can come together and drive positive change,” he said.
Richard Curtis, co-founder of Make My Money Matter, added that right now “we’re nowhere near maximising the potential of our pensions for people or for the planet”.
“The UK pension industry can quadruple its investments in climate solutions,” he said, adding that the report “shows how we can mobilise more than £1trn – a staggering amount – to help tackle the climate emergency, both at home and abroad”.
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, said the report recognises the good work already undertaken by pension schemes to achieve net zero and “rightly” acknowledges the willingness of pension trustees and managers to do more.
He said: “It is helpful that the report highlights that certain barriers must be removed to facilitate climate-aware investing; for example, there is a scarcity of investible and scalable assets and to overcome this problem the UK needs to develop a National Transition Plan, long term policy certainty and appropriate incentives.
“These are things the PLSA has also called for. It is also welcome that the report is clear that all such investment must be in the interests of scheme members and customers.”
Peaple added that the disclosure requirements in the UK are “world-leading”, with the government being the first to apply the internationally mandated Task Force on Climate-related Financial Disclosures (TCFD) requirements to pension schemes.
He said the pensions sector wants the government to accelerate its climate roadmap to ensure companies, asset managers and service providers catch-up with the expectations of pension schemes.
“Doing so will ensure that schemes have more accurate and meaningful data on which to base their strategies and commitments,” he noted.