As I explained on the Brightwell Pensions Unpacked podcast, a company with whom I work, climate change poses a clear and present threat to pension funds’ ability to meet their long-term financial commitments. If pension funds invest in assets that may become stranded as the world decarbonises, they risk undermining their ability to meet long-term obligations to members.
Continued increases in global warming will amplify existing risks and create new risks with potentially irreversible and catastrophic impacts on markets, society and the environment.
Good stewardship demands that pension funds actively assess and manage climate-related risks, ensuring that investments are resilient and future-proof.
This year, pension funds, particularly in Europe, have adopted a more assertive approach on climate risk with asset managers. In February twenty-six asset owners, controlling a total of $1.5trn (£1.14trn) in assets, warned their asset managers they risked being dropped if they did not engage more strongly on climate risk with companies. And some asset managers have lost investment mandates this year as pension funds have doubled-down on the requirement to comply with climate plans.
Thanks to the strong and consistent commitment to climate action and net zero of successive governments, over the past two decades the UK has attracted tens of billions of pounds of inward investment. Much of this money has been channelled through pension funds seeking sustainable, long-term returns, and generated many thousands of jobs.
The UK’s net zero economy generated £83.1bn in Gross Value Added (GVA) last year. This was an increase of 10.1% compared to the previous year, and the sector now supports around 951,000 full-time equivalent jobs. Pension funds have played a pivotal role in this growth, backing resilience infrastructure and innovative companies that are building a cleaner, more prosperous future.
Political consensus on climate action, and a robust accompanying legislative framework, in the UK has been crucial in giving long-term policy certainty to investors and making our country an attractive place for private capital, including pension assets, to invest in the clean, green sectors of the economy.
But recent political pushes against the net zero economy, and proposals to scrap the Climate Change Act, will end up endangering the investment climate that pension funds rely on to invest in the right sectors and assets to help achieve their net zero goals.
As chair of the UK Transition Finance Council, my focus is on ensuring more investment flows into hard-to-abate sectors, to help them transition from the grey to the green. Pension funds are central to this effort. By aligning their portfolios with the transition to net zero, pension schemes can deliver for their members and for society.
The economic case for climate action is overwhelming, and pension funds are key players. This is about jobs, resilient long-term investments and economic growth, as well as a cleaner environment for all. It is a case that businesses, and investors, must to continue to make to wavering politicians.
Lord Alok Sharma is chair of the UK Transition Finance Council. He is a former business & energy secretary and served as president of COP26