I have tabled new clause 12 and amendments 54 and 55 in order to highlight the need for the Department for Work and Pensions to address the systemic risks posed by climate change and natural resource depletion to pension schemes as a whole, and to suggest some positive solutions.
The Minister has already mentioned the report launched today as part of the new green light campaign by ShareAction, in partnership with the trade unions and environmental groups, which highlights the urgent need for reforms to the pension industry to ensure that it takes greater account of climate and environmental risks. I am glad that the Minister was able to be present to launch it.
Obviously, pension funds use the money paid into them every month to make investments in shares of companies, bonds, properties and other assets, which makes them enormously powerful players in shaping the economy, especially as they have significant investments in fossil fuel companies. However, if we want to keep climate change below dangerous levels, we need pension funds to fund and support a low-carbon economy by, for example, investing in clean technologies and low-carbon infrastructure projects. Moreover, today’s report shows that the UK pension funds have £3 trillion at risk from so-called unusable fossil fuel investments—fossil fuels which, if we are serious about keeping to our climate change commitments, we simply cannot afford to burn. That is a huge threat to the incomes of future pensioners.
In the UK an increasing number of voices are speaking out about the need for pension funds and others to divest themselves of fossil fuel assets. Operation Noah has launched “Bright Now”, a church divestment campaign whose first success came early this month when Quakers in Britain announced that they will disinvest from companies engaged in extracting fossil fuels, which made them the first UK Christian denomination to do so.
UK university students are increasingly engaged in divestment campaigns, as evidenced by the work undertaken by People & Planet. To date, there are 19 active divestment campaigns across the UK, including universities with large endowments: Cambridge, Oxford and Edinburgh.
Looking further afield, 70 of the largest pension funds in the US and the world issued a statement last week setting out their view that major fossil fuel companies may not be as profitable in the future, precisely because of efforts to limit climate change. They are asking for details on how the firms will manage a long-term shift to cleaner energy sources.
Here at Westminster, the recent Business, Innovation and Skills Committee report on the Kay review of the UK equity market and long-term decision making, which was produced earlier this year, recommended that the stewardship code should do more to address environmental, social and governance factors and systemic financial risks, as well as calling for more robust reporting on conflicts of interest.
I agree with the Minister’s comments this morning about the need for fiduciary duty to consider climate and environmental risks to our pension system and for this to be in the mainstream, first, because that is important to reduce the risks to pension holders themselves, and secondly, in order to harness the huge contribution that pension funds can make to the massive investment that we need in clean energy infrastructure. New clause 12 and amendments 54 and 55 make modest proposals of ways in which the Department could make that happen.
New clause 12 would require the Secretary of State to
“commission an independent review of the implications of climate change and natural resource constraints for the sustainability of private pensions.”
The review should
“consider the implications for long-term investment outcomes for members of work-based pension schemes of potential…systemic risks posed by high levels of exposure to fossil fuels and other carbon-intensive assets…economic and physical impacts of climate change under various climate mitigation scenarios; and…constraints on the availability of non-renewable resources”,
such as food, land and water resources.
That proposal builds on a landmark paper by the actuarial profession that modelled the implication of resource constraints for private pensions and found that, even in the best-case scenario, pension outcomes are likely to be worse than currently predicted because the industry is not factoring in risks associated with those constraints on food, water and land. In the worst-case scenario, savers in the model of a defined-contribution pension scheme were only half as well off, while the defined-benefit pension scheme became insolvent. The new clause also builds on work by Carbon Tracker on unburnable carbon, which shows that if the aim is to secure long-term returns, divesting from fossil fuel assets would be a pretty sensible thing to do.
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That divestment has started. Nordic life and pensions company Storebrand, which has more than 450 billion kroner of assets under management, excluded 19 fossil fuel companies from its investment line-up in July. That exclusion was based on concerns about the long-term financial risks of remaining invested in carbon dioxide-intensive companies.
Amendment 54 relates to the objectives of the Pensions Regulator. Clause 42 gives the regulator a new objective to
“minimise any adverse impact on the sustainable growth of an employer,”
which is pretty controversial, because it is based on the view that servicing pension deficits is hampering the ability of business to invest. My amendment would insert a new objective requiring the regulator also to
“promote, and to improve understanding of long-term and sustainable investment”
by pension schemes.
The current regulatory regime is fragmented: both the Pensions Regulator and the Financial Conduct Authority have some responsibility for work-based pensions. The regulator, however, has historically been reluctant to look under the bonnet of schemes’ investment strategies, focusing instead on governance and administration. The FCA has also paid little attention to the matter, seeing it as the regulator’s responsibility. Both treat sustainability as at best a sideshow and at worst an irrelevance. The amendment would specifically mandate the regulator to pay attention to the issues.
Finally, amendment 55 would amend schedule 16, which gives the Government powers to introduce new quality standards for automatic enrolment schemes through regulations. Consumer groups have rightly argued that Government have a responsibility to make sure that people’s pensions cannot be transferred out of a good scheme into a bad scheme. The Bill as drafted provides that the new quality standards may in particular relate to governance and administration, which is welcome, but it is equally important for policy makers to look under the bonnet of schemes’ investment strategies, if they are to operate in the best interests of pensioners. The amendment would, therefore, add a third leg to the quality standards relating to the ability of the scheme to generate sustainable investment returns. The detail of any such standards could include reference to a scheme’s policy and practice on things such as climate change risks, including natural resource depletion.
I welcome the fact that in his opening comments the Minister spoke pretty favourably about that agenda and my amendments, and I understand his point that he needs to take a cross-Government, integrated approach to what fiduciary duty really involves. I do not, however, see that as an argument against my amendments—at least not all of them.
I draw the Minister’s attention to new clause 12 in particular. It is specific to the pensions field and is about finding the evidence that will help feed into precisely the cross-Government approach he advocates. I ask him again to accept the new clause, which would at least give us some comfort and reassurance that he is serious about delivering on his warm words this morning. The new clause is not just about fiduciary duty; it is about gathering data on the impact of climate change
and natural resource constraints for the sustainability of private pensions and for a better understanding of the systemic risks posed by high levels of exposure to fossil fuels and other carbon-intensive assets. To my mind, that is a prerequisite for any future integration across Government of this kind of concern. I see it as an issue not of moving ahead of the rest of the Government, but of gathering information that will be very useful to Government. I ask the Minister again to consider accepting new clause 12.