UK schemes lobby ministers over climate ambitions
Some of the UK’s largest pension schemes have written to prime minister Boris Johnson and other senior politicians calling for strong action on climate change ahead of the COP26 conference in November.
Organisations representing more than £233bn in pension assets, as well as the UN Principles for Responsible Investment, called for the government to utilise “the City of London and private finance” to help realise its strategy to become a net-zero carbon emissions economy by 2030.
They called for the government to consider “co-designing dedicated investment funds” and giving a clear net-zero mandate to the National Infrastructure Bank.
When dealing with a risk on the scale of climate change, investors need to use all of the levers at their disposal to mitigate that risk
“The domestic net-zero strategy to be published this year must address the sustainable land use challenges faced by the UK, including meeting afforestation targets and peatland restoration,” the letter stated.
“Improvements to energy efficiency in our buildings should also be prioritised, with an ambitious Future Homes Standard and the Green Homes Grant put on a permanent footing.”
The signatories requested meetings with ministers ahead of the UK hosting the COP26 climate conference later this year, to discuss “how the financial sector can contribute to the UK’s decarbonisation efforts”.
They added: “Climate change is recognised as the most significant global risk facing investors. For our beneficiaries, it threatens their livelihoods, their retirement savings, their health, their quality of life.
“Even a short delay in implementing the necessary policies increases the likelihood of a disorderly transition, threatening beneficiaries’ savings and the resilience of the financial system.”
Aside from the prime minister, the letter was also addressed to chancellor Rishi Sunak, secretary of state for business, energy and industrial strategy Kwasi Kwarteng, and Alok Sharma, who was recently appointed president of the COP26 conference.
Emmet McNamee, senior policy analyst at the PRI, praised the pension funds’ move, saying: “When dealing with a risk on the scale of climate change, investors need to use all of the levers at their disposal to mitigate that risk.
“In responsible investment there is a big focus on capital allocation and stewardship of investee companies, but policy engagement should also be a core part of investors’ approach to stewardship.
“We welcome these asset owners stepping up to advocate for changes that are in the long-term interests of their beneficiaries. We need not only green portfolios but green economies.”
The signatories include four Local Government Pension Scheme pools — Brunel, Border to Coast, Local Pensions Partnership and LGPS Central — as well as RPMI Railpen, BT Pension Scheme, the Northern Ireland Local Government Officers’ Superannuation Committee, and the Unison Staff Pension Scheme.
Electric vehicles key to net-zero goal
The same group also sent a separate letter to transport secretary Grant Shapps, calling for the government to prioritise addressing the high level of carbon emissions from the UK’s road network.
The UK has already committed to banning new sales of petrol and diesel cars by 2030, but the signatories called for further incentives for people to buy electric vehicles and expand the country’s charging infrastructure.
The investors also emphasised the importance of a “just transition” for workers in the transport and related sectors. The government’s decarbonisation plan for transport should “set out how autoworkers and related service providers will be protected, give details of retraining to be provided, and tackle the affordability of [zero-emission vehicles] for low-income groups and small businesses in the road haulage sector”.
The letter to Mr Shapps concluded: “As the hosts of COP26, the decisions made by the UK on its domestic decarbonisation efforts will have repercussions around the world, and will have a disproportionate weight in our ability to achieve net-zero emissions by 2050 and protect our beneficiaries from the worst effects of climate change, both on their savings and on their lives.”
The letters can be viewed here.
The government has continuously emphasised its determination to lead on climate change issues, with pension funds under particular scrutiny. The Department for Work and Pensions is developing rules requiring schemes to report on the climate change impact on their investment portfolios.
Speaking at the Pensions and Lifetime Savings Association’s annual conference in October 2020, pensions minister Guy Opperman pledged more announcements on climate change covering “the whole investment chain” in the build up to COP26.
Climate casts gloomy shadow over investments
The letters coincided with new research from Schroders demonstrating the negative impact that a changing climate is expected to have on long-term asset returns.
Emerging markets are expected to be most heavily affected by higher average global temperatures, Schroders found. Emerging equity markets’ average annual returns were forecast to be roughly 1 percentage point lower through to 2050 because of climate change, as productivity was expected to fall in hotter countries.
However, lower-risk assets will also be weighed down by the effects of climate change, according to the research’s authors, economist Irene Lauro, and strategist Tina Fong. In particular, the gap between expected returns from equities and sovereign bonds widened compared with Schroders’ analysis last year.
“Investors will still feel pressured to move up the risk curve in search of higher returns over the next 30 years, underlining the importance of investing actively,” the authors wrote.