The summer of 2023 was the hottest on record and the heatwaves, wildfires and floods seen in Europe threw the scale of the climate crisis into sharp relief. System-wide action is needed to decarbonise, and fast.
The UK’s commitment to become a net zero economy by 2050 is important and demonstrates the kind of leadership and good intentions needed to drive change. But the transition to net zero will take more than good intentions. In fact, estimates suggest that to deliver on the UK’s net zero ambitions around £2.7trn of investment is needed between 2021 and 2035.
Finance, then, will be critical in effecting the transition to net zero, and of all the public and private funding streams that could play a role, the UK’s pension funds are increasingly in the public consciousness. And it’s true – the UK pension market commands more than £3trn in assets and your retirement savings can potentially play an important part in funding the transition while delivering returns for you. But as things stand, we’re a way off realising that potential.
As I’ve said, becoming a net zero economy requires significant investment in climate solutions – think offshore wind, solar, carbon capture and storage, and energy-efficient housing to name a few. All these investments fall within what we call sustainable and productive assets – but currently the UK doesn’t invest nearly enough into these assets. In fact, when we look at specific asset classes, UK pensions allocate just 9 per cent of their assets to alternatives such as property, private equity and infrastructure. The average among other countries with large pension markets is 23 per cent. As a result, UK pension savers are facing lower returns than their counterparts in, say, Australia and Canada, and UK businesses are missing out too.
At Phoenix, the UK’s largest long-term savings and retirement business, we don’t think that’s right. Ultimately our pension funds must deliver the best returns for our 12 million customers, and their interests must always be front and centre. When it comes to our own net zero commitments, our focus is on managing the risks and maximising the opportunities of climate change for our customers, most of whom think it is important that we invest responsibly on their behalf. So, investing in sustainable and productive assets such as high-growth, homegrown, green tech companies is good for our customers and good for the planet – they’re financially sustainable investments precisely because they’re environmentally sustainable.
Over the past two years we have invested around £1.4bn in climate solutions in the UK and abroad, and we’re committed to increasing this – but that’s currently easier said than done. For us and other pension companies to invest in more climate-focused productive assets, we need a stronger pipeline of investable opportunities and more favourable conditions.
The government has already introduced some significant investment reforms that stand us in good stead. Solvency II reforms should provide insurers with more flexibility to invest in a broader range of assets. It should mean it no longer costs us more to invest in a wind farm than a coal plant. Similarly, the Mansion House Compact is likely to pave the way for a more environmentally sustainable financial system by enabling Defined Contribution schemes to invest in more sustainable and productive assets. We will work with government and regulators to ensure these reforms land effectively to deliver substantial investment in climate solutions.
And there’s more work to do, so we’ll keep working with industry and policymakers to make it happen. For example, to establish a better pipeline of investable opportunities, we’re asking for a greater level of detail and specificity from the government on how it will deliver its long-term vision for a net zero economy. In particular, a clear, sector-specific policy and investment framework would enable private sector investment into climate solutions to flow at scale. I’m also personally convinced that one of the keys to successfully delivering net zero is locally led action – and we recently sponsored the publication of the Local Mission Zero Network report, which recommends that greater powers and responsibilities be given to regional and local authorities to capitalise on the economic opportunity and deliver net zero at scale and at pace.
It’s promising that there is a building political consensus on this subject and encouraging that the Shadow Chancellor, Rachel Reeves, recognises the role of pension funds in the UK’s long-term growth. I hope as we near the election she’ll set out plans for how that intersects with Labour’s mission to make Britain a clean energy superpower – and I’d welcome the opportunity to work constructively with Labour, and indeed all parties, to help shape their approach.
There’s more interest than ever in the role pension funds can play in the net zero transition – and now is the time for change. By making it easier to invest in sustainable and productive assets, pension companies like ours can simultaneously deliver the best outcomes for our policyholders and the planet.