UK pension funds can pump £1 trillion into climate fight – report

The UK’s largest long-term savings and retirement business, has called for regulatory reforms which would allow the country’s pension firms to quadruple their investment in UK climate solutions.

In a new report by the Phoenix Group in conjunction with campaign group Make My Money Matter the report, “Unlocking Investment in Climate Solutions”.

The study provides new data on the significant role that the UK pensions industry can play in financing the UK’s path to net zero, as well as supporting developing countries financing their transitions. It considers the current policy, market and regulatory barriers and outlines how government, regulators and industry can collaborate to overcome these, while ensuring the best outcomes for pension savers.

The publication follows the release of Phoenix Group’s Net Zero Transition Plan earlier this year in which the company outlined its pathway to decarbonising its entire investment portfolio by 2050.

The research concluded 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 £1.2 trillion of their UK asset allocation. Such investments would account for half of the gross capital investment in climate solutions which is needed by 2035 for the UK to remain on track with its net zero transition.

In contrast, today only £0.1 trillion 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, and without further action, that would rise to up to £0.3 trillion investment between now and 2035.

Chris Skidmore MP, chair, Mission Zero Coalition, said the opportunities had to be seized if the UK was to deliver on its aims.

“We welcome this report by Phoenix Group and Make My Money Matter, which shows the enormous opportunity both in the short and long term, that the pensions industry can achieve in helping drive the UK’s net zero ambition,” he said. “To do this, collaboration between government, regulators and industry will be key, and we look forward to continuing working, through the Mission Zero Coalition, with Phoenix and the wider industry to drive investment and growth in the UK economy.”

While the report acknowledges that there is appetite across the UK pension industry to scale up investment in climate solutions, it cautions that many pension schemes are struggling to match their ambition with action. The report summarises the two key barriers to inhibiting progress are:

  1. Demand for finance – scarcity of investible and scalable opportunities – for example, many climate solutions face high levels of bureaucracy in permission processes or tend to be heavily fragmented rendering them less amenable to scaling, while an absence of clear national transition plans also inhibits action.
  2. Supply of financing – regulatory constraints on UK pension industry – for example, liquidity constraints and fee cap for Defined Contribution (DC) schemes limit the appeal of illiquid long-dated investments, which many climate solutions are.

To help overcome these barriers and unlock greater investment in climate solutions, the report identifies seven strategies for policymakers, regulators and industry to consider. The highest priority strategies for consideration over the next 12 months, based on feasibility and potential impact, are identified as:

To address demand for finance the report calls for the country to focus on:

  • Developing a UK climate transition plan with sector-specific strategies and clear roadmaps
  • Outlining a consistent planning and permitting regime to prioritise the go-to-market and scaling of climate solutions projects.
  • To address supply of financing: it added there need to be steps to:
  • Provide clarity on considering climate impact as part of fiduciary duties.
  • Deliver matching adjustment reform (Solvency UK), with guardrails linked to productive/sustainable finance.

Additionally, the report outlined short term actions the pensions industry can and already are 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, Phoenix Group, explained: “We all know finance will be critical to successfully transitioning to net zero, and our new report with Make My Money Matter sets out clearly, for the first time, the significant role the pension industry could play while continuing to prioritise the best outcomes for pension savers. 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.

“This research will help us start much-needed conversations with government, regulators and our peers so that we can 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.”

Richard Curtis, co-Founder of Make My Money Matter, said: “Our pensions can, and must, play a critical role in tackling the climate crisis. But right now, we’re nowhere near maximising the potential of our pensions for people or for planet.

“That’s why this new report is so important, outlining how, with increased ambition and collaboration – and supported by the right policy and regulatory reforms – the UK pension industry can quadruple its investments in climate solutions.

“By taking these steps, this report shows how we can mobilise more than £1 trillion, a staggering amount, to help tackle the climate emergency, both at home and abroad. By doing so we can put our money to work for people, planet, and a prosperous retirement, and ensure we all have pensions we can be proud of.”

The research concluded 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 £1.2 trillion of their UK asset allocation.