Pension Funds: Financial and Ethical Investments — [Mr George Howarth in the Chair]

– in Westminster Hall at 11:28 am on 22nd May 2019.

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[Mr George Howarth in the Chair]

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs) 2:30 pm, 22nd May 2019

I beg to move,

That this House
has considered financial and ethical risks of investments in fossil fuel companies by pension funds.

I refer Members to my entry in the Register of Members’ Financial Interests, in which I disclose my interest in renewable energy, particularly solar.

Parliament has declared a climate emergency. I welcome that tremendously, but it prompts the question: how do we solve that emergency? The good news is that many of the technologies we need are already here, and they are developing fast. From solar to wind to storage, their price is coming down fast—far faster than many people expected—and their reliability is increasing dramatically. On top of that, massive innovation will propel those technologies further forward, and we will enter a cheap green energy age.

The barriers to dealing with the climate emergency are no longer technological; they are more about policy, leadership and cash. We need politicians to show leadership, but we also need to ensure that investment funds get behind the new technologies at a speed and with an urgency that currently we are not seeing. That is why we, as a country and as the world, need to disinvest from fossil fuels and dirty technologies, and reinvest in clean green technologies. The question is how we propel that as fast as possible.

I believe we need a system-wide approach. We have to decarbonise capitalism at a fundamental level across the whole of the City—the debt markets, the stock exchange, the banks, the Bank of England’s own balance sheet and the pension funds. The Committee on Climate Change has asked for Britain to become carbon net zero by 2050, but we produce only 1% to 1.5% of global greenhouse gas emissions. However, 15% of the world’s greenhouse gas emissions are funded in London, so not only do we have the power to get our own country’s greenhouse gas emissions down to zero, but we can help spread that around the world and be a real leader. We could be the green finance capital of the world and say, “We will no longer finance the climate crisis in our country.” If we did that, we would show dramatic leadership in the world on this emergency. We should start with pensions.

Photo of David Drew David Drew Shadow Minister (Environment, Food and Rural Affairs)

The right hon. Gentleman is making a cogent argument. Can he assure me that the parliamentary pension fund, which has long been looking at this issue, is now clear of fossil fuels? We should ensure that that is completely the case.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I believe that is not the case. We need to ensure that the parliamentary pension fund becomes zero-carbon. We as Parliament need to say, “Divest Parliament.” That would show leadership both to public schemes, particularly in local authorities, and to the wider sector. Let us remember that we have already discovered four to five times the fossil fuels the world would need to exceed a climate change budget. We already have too many fossil fuels. We should not invest in more. We should disinvest now.

Photo of Wera Hobhouse Wera Hobhouse Liberal Democrat Spokesperson (Environment and Climate Change), Liberal Democrat Spokesperson (Justice)

The previous Government target to cut carbon emissions by 80% by 2050 is no longer relevant because we have to cut our emissions to net zero, so fracking, which is a source of carbon fuel, is no longer an option for this country. Should not the Government reflect that new reality and issue new planning guidance for local authorities or give them new powers? Such leadership would have an immediate consequence: investment in fracking as a source of fossil fuel would no longer be an option or attractive to investors.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I totally agree with my hon. Friend. In government, we placed tough regulations on that sector, which were based strongly on environmental considerations. It has not been able to grow to meet them. It has nowhere to go.

Photo of Bambos Charalambous Bambos Charalambous Opposition Whip (Commons)

I congratulate the right hon. Gentleman on securing this important debate. I agree entirely that Parliament should take the lead in not investing in fossil fuels. Yesterday, BP’s investors decided that it should adopt a totally different strategy on carbon fuels so it fits in with the Paris agreement on climate change. Does he agree that other companies should take that way forward?

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I saw what happened at the BP annual general meeting yesterday, and I welcome it, although a second motion, which was a bit stricter, did not carry. I would have liked that motion to carry.

That brings me to my argument. Not only is there a moral imperative for us to divest, given the threat climate change poses to our planet; there is also a financial risk for pension funds and their beneficiaries. We need to explore that. We need to make it clear to pension fund managers and trustees that pulling out of fossil fuels is the right thing to do in financial terms. The real issue is often called the carbon bubble. We are investing in more fossil fuels than we could possibly need if we were going to stay climate change compliant. At some stage, that bubble of investment in carbon that we do not need will burst, leaving pension funds and the wider economy in a serious mess. Those assets would be worthless; they would be stranded assets, which would cause huge disruption in our financial sector.

Photo of Tommy Sheppard Tommy Sheppard Shadow SNP Spokesperson (Cabinet Office), Shadow SNP Spokesperson (Scotland), Shadow SNP Spokesperson (House of Lords)

I agree completely with what the right hon. Gentleman is saying. I think he is coming to the heart of the matter. I, like many other people, have a private pension fund, and I instruct my broker to ensure that it is directed into ethical investments. Of course, the broker has always said, “You’re not going to get as much of a return as you might get if you invested in other things.” The time has come for that paradigm to be reversed. We have to explain to investors that, over the next 10 to 15 years, increasing governmental action against fossil fuels and dirty technology will make their returns worse. Now is the time to jump ship and to disinvest from dirty technology.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I totally agree. Indeed, analysis by the Grantham Institute shows that if someone had not held fossil fuels in their portfolio for the last 50 years, their overall returns would not have been any different. The idea that we have to invest in fossil fuels to have a return was not true in the past, and it is not going to be true in the future.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I am grateful to the right hon. Gentleman for giving way. I thought I would intervene at this stage to try to frame the debate, because I think some colleagues will not be aware of the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018, which the House passed in September last year. Those regulations require environmental, social and governance matters to be taken into consideration as part of the statement of investment principles, and require individual pension fund trustees to take into account ESG factors when considering their strategic process to invest. I suggest that is one of the reasons why BP, the parliamentary scheme and others are beginning to change their approach. Those regulations will come into force in October.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I am grateful to the Minister for his intervention. Those new ESG guidelines are helpful, but I am afraid I do not think they are quite up to the scale of the task we face. I will come to that in a second.

We have this carbon bubble; the question is how we are going to deflate it. How will we move from where we are now, with this big risk to our economy, to the low-carbon economy we need? One option is to say, “Well, it will sort itself out. We don’t need to worry now. We can delay it all and it will be all right. We can allow the fossil fuel companies to keep investing in exploring and getting even more fossil fuels, and inflate that bubble even more.” How risky would that be? That is one scenario that some people seem to think is possible. I reject it entirely.

Another approach is to say, “Let’s reduce, and ultimately stop, exploration for further fossil fuels. Let’s not inflate that bubble any more. Let’s gradually deflate it, so we can have an orderly transition for our economy, our energy sector and all the communities, towns, cities and people who depend on it.” That is the solution, and that is why I have concluded that we must disinvest and reinvest in a thoughtful, careful way. If we do that, we can tackle the climate emergency and avoid a financial and economic catastrophe.

That brings me to the Minister’s point. There are three possible approaches to disinvestment and investment. One is what I would call the gentle, market-led approach, which says, “If you have a bit more transparency and disclosure and a few ESG guidelines, it will all take care of itself.” I am in favour of all that stuff, but it is nowhere near up to the task. It is not urgent enough. We have people talking about voluntary disclosure. No, we need mandatory disclosure now, regulated by this House. I applaud the ESG guidelines, but they are a little woolly and poorly defined. They are little nudges when we need more than a nudge, because this is an emergency.

There is a second, state-led approach advocated by at least one Front-Bench team, involving wholesale nationalisation and dismantling capitalism. That would be the wrong approach, because it would delay action and not enable us to take the power of capitalism, with market forces, innovation and competition, to help us solve the problem.

We need to make capitalism our servant, not our master, and that comes from laws and regulations in this House. I propose a five-point plan systematically to decarbonise capitalism and tackle the disinvestment and investment challenge of the pension funds. First, there should be mandatory disclosure from all fossil fuel companies on how much carbon their business plans would see emitted and how much carbon is in their reserves. That should be coupled with a legal requirement to show how they will become compliant with the Paris treaty, with timed targets, so that fossil fuels can unwind the pollution they cause.

Secondly, there should be new climate accountancy rules for accountants and auditors on fossil fuels and pension funds, which would require accountants and auditors to produce Paris-complaint accounts, where assets and activities not aligned with the Paris treaty are written down to zero by 2050 at the latest. I think that would change the valuation of a number of companies. We would see a lot more transparency, really know what was going on, and be able to take better decisions.

Thirdly, there should be new, mandatory requirements on all pension fund managers and trustees to report on whether their portfolios of investments are aligned with Paris or not—really strong transparency and disclosure. Fourthly, there should be new powers for pension regulators, and the Bank of England if required, to challenge funds and other investment operations on their climate risk management. Where that is found wanting, the regulators should be able to take action to ensure proper alignment.

Fifthly, we need to develop a register—probably Government-led—of all the low carbon, green and zero carbon investment opportunities for the capital to go to. We cannot just say disinvest; we must show where investments and that capital should go. The good news is that there are a huge number of very attractive low carbon and zero carbon investment opportunities in this country and around the world, so we can ensure that our pensioners of the future get the pensions that they need and that those pensions are far less risky because they will be based on climate-friendly assets.

Photo of David Duguid David Duguid Conservative, Banff and Buchan

The right hon. Gentleman seems to be advocating a reduction of investment in energy companies. Does he recognise—I am sure he does from his time as Energy Minister—that many such companies, and particularly the larger international oil companies, are investing in new technologies, cleaner technologies and research and development in renewable energy?

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

I am not trying to get rid of energy companies; I am trying to get them to switch. We have a couple of examples of big energy companies switching out of fossil fuels and into green technology. Some have done that around the world successfully. Unfortunately, most of the majors to which the hon. Gentleman refers have not done so on any serious level at all. I did some calculations that showed on average their capital expenditure on green technology in the last decade or so is just 1.3% of their total spend. That is just not serious. I hear what he says, but we must get those energy companies to take this far more seriously. Some are beginning to shift, but we need to show that they must step up to the plate.

We have a climate emergency, and it is great that we are seeing people—young people in particular—coming out and protesting. I celebrate what they have done. There is a thirst for Governments to take action. The question is: are our actions up to it? The only response to what people are arguing for and what the science says is a quite dramatic systemic change. In the disinvest and reinvest approach and the policies I have outlined, I want to argue for something very radical but practical.

Those who go to the City and talk to pension funds such as Legal & General, Allianz and Axa will find that a number of them are doing what I am talking about. Those who talk to the Governor of the Bank of England, Mark Carney, as I did four weeks ago, will find that he is absolutely on to this case. There is a coalition of willing people in the City who want to go this way; it is just that this Government and Parliament are behind the City and the regulators. We must get in front of them, because they want us to show true leadership. Let us today give that leadership.

Several hon. Members:


Photo of George Howarth George Howarth Labour, Knowsley

Order. Before I call the next speaker, in view of the importance that people rightly attach to this issue, a large number of people want to speak. Accordingly, I will have to impose a time limit on speeches of five minutes. I may have to reduce that later.

Photo of Richard Graham Richard Graham Conservative, Gloucester 2:47 pm, 22nd May 2019

I congratulate Sir Edward Davey on obtaining this debate, which is relevant, timely and of key interest to many Members across the House, not least those who are members of the parliamentary pension scheme. I draw attention to my entry in the Register of Members’ Financial Interests and highlight that I used to run the pensions business for a significant UK asset manager before coming to the House and that, along with my hon. Friend Mr Jayawardena and Mr Betts, I am one of the three current Members of the scheme’s board of trustees.

I have three points to highlight. First, this is a challenge for all pension funds not just in the UK but across the world. The rules and regulations by which pension funds are governed have changed significantly, not least under this Conservative Government. The Law Commission reports of 2014 and 2017 are relevant: 2014 was the first time that pension funds had in effect an obligation to take ethical or environmental issues into account. The 2017 changes allowed for some social investment. The parliamentary guidance to which my hon. Friend the Pensions Minister referred, which came in last autumn, made a significant change in requiring trustees to report, as part of the statement of investment principles, on the portfolio’s effect on climate change and what trustees intended to do about that. That is the background.

The parliamentary pension fund is conscious of its obligations under the 2018 regulations. We have had several meetings and discussions with different advisers to consider how we might best tackle the challenges and how to amend our statement of investment principles. The three existing Members who are trustees—me, my hon. Friend the Member for North East Hampshire and the hon. Member for Sheffield South East—had a separate meeting, and we also met one of the world’s leading green asset managers to look at what sort of investment vehicles are available to schemes that want to take a greener approach.

That leads to my second point. In trying to make a pension scheme greener, we have to be honest about the scale of the ambition that the right hon. Member for Kingston and Surbiton set out. I think I heard him correctly when he said that pension schemes should invest in new technologies to try to be carbon free. I challenge that gently, because I do not believe there is a company in the world that is completely carbon free and has never used a single vehicle, train or aeroplane that uses fossil fuels or any form of heater or boiler that runs on gas. It is virtually impossible, at this stage, to measure the complete carbon footprint of any business of significant scale.

As an illustration of the proof of that pudding, which shows the challenge for individuals, the chairman of Ecotricity—whose headquarters is in the constituency of my neighbour, Dr Drew—is an outspoken champion of everything green, but he clocks up a huge number of air miles every year as a global ambassador for sport, for some United Nations subsidiary. My guess is that he does not travel economy class. There are challenges at an individual and at a corporate level.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs)

To clarify, I was focusing on ensuring that companies were compliant with the Paris treaty. That does not mean that they need to be zero carbon now—that would be impossible—but they need to be on a pathway that is Paris compliant, and that is the case for many companies already. We just need fossil fuel companies and others to catch up.

Photo of Richard Graham Richard Graham Conservative, Gloucester

I am grateful for the clarification. I think the right hon. Gentleman understands that, from a personal investor or a pension fund investment point of view, finding an entirely fossil fuel-free investment would be very challenging.

My third point is that there is a challenge not just for pension funds, but for the wider financial sector. The most innovative green energy projects in the UK, particularly those looking at how we can mobilise some of the most powerful tidal streams in the world—including wave technology in the north of Scotland and cases being worked on in Cornwall, Hampshire and the west coast of Wales—are not easily accessible investment vehicles and are not at the scale that a significant pension fund could easily invest in. It would be useful to look at challenges around some investment regulations, including how major investors, such as large insurance companies that manage huge pension assets, could be allowed to invest more money almost in creating businesses to invest in new technologies.

I am conscious that time is running out, so let me move to my final point.

Photo of George Howarth George Howarth Labour, Knowsley

Order. I am sorry; the hon. Gentleman has exceeded his time limit.

Photo of Matt Western Matt Western Labour, Warwick and Leamington 2:53 pm, 22nd May 2019

It is a pleasure to serve under your chairmanship, Mr Howarth. I thank Sir Edward Davey for bringing this important debate to the Chamber.

Pension funds are hugely important—they are also personally important to me—because they are major stakeholders in the UK and global investment markets, with £2.8 trillion invested in assets and more than £90 billion invested a year on behalf of 84% of UK workers. That is why leadership is so important in this sector. In 2015, when I was a councillor at Warwickshire County Council, I wanted the council to show leadership and go fossil fuel free in recognition of what the Rockefeller Brothers Fund and several other major investors had done at that time by diverting from the fossil-fuel industry into the renewable sector. I felt that if that necessity was recognised by the once all-important Rockefeller company and family, we should look to follow. Sadly, that motion was put to the vote and lost.

The motion failed because of the rules of the local government pension scheme, the LGPS, which are set nationally but administered locally. Its responsibilities include managing the investment funds within a statutory framework. The 2014 Law Commission report on “Fiduciary Duties of Investment Intermediaries” concluded:

“Where trustees think ethical or environmental, social or governance (ESG) issues are financially material they should take them into account. However, while the pursuit of a financial return should be the predominant concern of pension trustees, the law is sufficiently flexible to allow other, subordinate, concerns to be taken into account.”

For me, that is important. More recently, I checked the Local Government Association legal advice, which says that

“the precise choice of investment may be influenced by wider social, ethical or environmental considerations, so long as that does not risk material financial detriment to the fund.”

Mark Carney, the Governor of the Bank of England, recently wrote about that. He said meeting the Paris targets

“requires a massive reallocation of capital. If some companies and industries fail to adjust they will fail to exist.”

He pointed out that fossil fuel investments carry major financial risks since overvalued carbon assets may be left stranded. This stranding could cause a global wealth loss of $1 trillion to $4 trillion, posing major risks to pension funds.

One does not have to look just in the UK or at what happened with the Rockefeller Brothers Fund. The California Public Employees’ Retirement System and the California State Teachers’ Retirement System divested themselves of any holdings of thermal coal in 2015. Norway’s sovereign wealth fund is dumping investments in firms that explore for oil and gas. This strategy shift, on the back of advice from the country’s central bank, will affect 1.2% of its holdings, worth about 66 billion Norwegian krone, which is a significant amount. According to Norway’s Minister of Finance:

“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline. Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.”

More recently, the Environment Agency decarbonised its £2.9 billion pension fund by increasing climate positive investments, reducing its exposure to the coal industry by 90% and greatly reducing its exposure to oil and gas. More parochially, Southwark Council has moved £450 million into passive funds that track low-carbon and fossil-free indices produced by MSCI. It has invested £30 million in the Glennmont Partners clean energy fund III, which invests in western European wind and solar companies. For me, that shows great leadership and is to be commended.

Sadly, according to the 2018 report of the parliamentary contributory pension fund, its largest holding is in BP. The fund has no positive investments that are committed to bringing about a zero-carbon world, which is a real shame. Hence, 244 serving and former MPs have signed the Divest Parliament pledge calling on the trustees to phase out investments in fossil fuel companies; I have signed that pledge. As if to underline this move, the Church of England’s General Synod—its parliament—voted 347 to 4 in favour of removing its holdings in fossil fuels. That type of leadership is widespread and it is something we should follow.

In following the leadership of others, and going for socially, environmentally and economically advantageous investments, let us ensure that we are Paris compliant. Almost 20 years ago, BP rebranded as Beyond Petroleum. Let us go beyond petroleum, beyond BP and show leadership.

Photo of David Warburton David Warburton Conservative, Somerton and Frome 2:58 pm, 22nd May 2019

It is a pleasure to serve under your chairmanship, Mr Howarth. I join others in congratulating Sir Edward Davey for his efforts to bring this important debate to the House. I found his five points interesting and inviting.

The question we are looking at today might seem divorced from the emergency that Parliament has rightly declared in respect of climate change, but in fact it cuts to the heart of the issue. There is a causal and consequential link between finance and the environment, as we have heard, as well as environmental implications of investment strategy and supply chains.

As Members will be aware, article 2 of the Paris agreement states the need to make

“finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

The fact that it is not merely ethically and environmentally better but more financially prudent to move away from fossil fuel investments is a welcome sign that the systemic change we need is slowly coming together. Along with an ever-growing number of MPs from all parties, I signed and fully support the Divest Parliament pledge. Parliament must lead the way, lead the debate, lead by example and lead by action.

If we are to achieve a net zero target before 2050, we require not only political will but the active support of all sectors of society. The low-carbon sector and its supply chain now provides nearly 400,000 green-collar jobs in the UK—more than aerospace—and is growing considerably faster than our main economy, with estimated potential exports of more than £60 billion by 2030. Lord Deben, chair of the Committee on Climate Change, said that the CCC had been deliberately cautious in drawing up its 2050 target and had deliberately excluded the impact of technological innovations, as we heard earlier, which could hasten the UK’s progress towards a net zero target in ways that cannot currently be anticipated. So our progress in meeting our environmental targets directly depends on the prosperity of our green economy.

We know that the personal is increasingly becoming the political, and vice versa. Few things would more erode the channels of communication between Parliament and the public than our asking one thing of them while tacitly endorsing something else ourselves. We cannot just talk the talk; we also have to walk the walk. If we are to work alongside our constituents and harness their energy in eliminating net UK emissions, it is vital that we divest the parliamentary pension fund of fossil fuel investments. I therefore welcome the recent pledge by the fund trustees to

“prepare a climate change policy” and to “show ambition” in formulating a responsible business plan that is in line with the principles being discussed today. As we have heard, this is not just about the parliamentary fund but about the broader symbolic implications of such a step.

The Governor of the Bank of England and the Environmental Audit Committee have publicly warned of the dangers of over-exposure to carbon assets in the light of the international drive towards net zero. Hon. Members will be familiar with the 2006 Stern review and the pivotal role it has played in shaping understanding of the interaction between climate change and the economy. Lord Stern recently suggested that the economic models under which current projections are produced systematically underestimate the economic implications of climate change and its effects. A study published last year by the co-director of the Oxford University climate econometrics project describes the catastrophic economic consequences of a 2° C jump in the global temperature, and how, beyond that headline figure, the poorest countries will suffer the direst economic effects.

Since the introduction of auto-enrolment in 2012, the percentage of UK workers in a pension scheme has mushroomed. Ignoring the effects of investment strategies really is disastrous short-termism. The parliamentary fund needs to demonstrate the beautiful truth that long-term measures to mitigate climate change and long-term investment strategies are not incompatible—far from it. In fact, they can form a fabulous virtuous circle, and one that I hope will be beneficial to us all.

Photo of George Howarth George Howarth Labour, Knowsley

Order. To give people time to adjust their speeches, I say now that I will reduce the time limit to four minutes after the next speech.

Photo of Alex Sobel Alex Sobel Labour/Co-operative, Leeds North West 3:03 pm, 22nd May 2019

I welcome this important debate, secured by Sir Edward Davey. It follows the Environmental Audit Committee’s inquiry into green finance, which he clearly read because his recommendations seem to mirror our own. It is good to see Committee members who served on that inquiry in the Chamber.

The physical impacts of climate change, such as rising sea levels and increased frequency and intensity of extreme weather events, will pose increasing economic risks for a range of businesses and investments, from food and farming to infrastructure, homebuilding and insurance. In the UK alone, climate change is projected to increase the risk that business assets and operations are damaged and disrupted by flooding, degrade some of our most productive agricultural land, to reduce water supplies, to increase the frequency and intensity of heatwaves, and to stress transportation, energy and water infrastructure. There are a great many risks for investors to consider.

For instance, climate change may result in liability risks when those who suffer losses as a result of climate change take legal action to recover damages from those who can be found responsible. For example, the city of New York is currently seeking to recover costs from BP, ExxonMobil, Chevron, ConocoPhillips and Shell as a result of flooding. Transition risks could also be faced by companies in high-carbon sectors that fail to diversify and adapt to policies introduced in response to the Paris climate change agreement. Firms that do not make a timely transition and remain over-invested in climate-changing activities could face costly regulatory action, suffer reputational damage, or see their assets become stranded as carbon prices rise. Our inquiry found several examples of stranded assets, such as oil refineries or fracking infrastructure. A Bank of England paper published in 2016 warned that

“a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets”.

These are real challenges for pension providers and pension investors.

Our Committee heard about a range of worrying practices in the pension industry, including the fiduciary duty of pension scheme trustees often being misinterpreted as a duty to maximise short-term returns; remuneration for investment consultants and fund managers encouraging a pursuit of short-term returns rather than long-term value creation; and a tendency to under-invest in physical assets, technology innovation and employees’ skills in preference for nearer-term gains from financial mergers, acquisitions or restructuring. In the context of our climate change risk, we want none of those things.

Photo of Clive Lewis Clive Lewis Shadow Minister (Treasury)

It is really good to hear hon. Members talk about climate change and greenhouse gases, but there are in fact nine planetary boundaries, of which greenhouse gases are one. I wonder whether people understand that it is entirely possible that we save the planet from climate change yet kill ourselves through eight of the other planetary boundaries, two of which we are in the red for. Is it not the case that financial markets, pension schemes and so on actually need to see their remit as wider than just greenhouse gases, also covering a range of other areas, including biodiversity and carbon?

Photo of Alex Sobel Alex Sobel Labour/Co-operative, Leeds North West

Absolutely. A range of factors, including air quality and the insect population and pollinators, should be taken into account. It is not just about fossil fuels, but as the debate mainly concerns fossil fuels and climate change, I will concentrate on those. I recently led a debate on insect populations. It is good that we are looking at all of that in the round.

There are structural incentives in the UK for maximising short-term returns over long-term investments, which are much more climate-sensitive. The Government should clarify that pension schemes and company directors have a fiduciary duty to protect long-term value and should consider environmental risks in the light of that. Some pension companies are taking that up, and investors are also looking for better, fossil-free pension options. A 2017 YouGov poll for Good Money Week found that more than half of 18 to 34-years-olds—the pensioners of tomorrow—would like fossil-free investments offered as standard.

We need to make progress, and the Government need to bring in stricter rules. The Committee found that the current rules are that trustees or governance committees legally must have good reason to think that scheme members would share their concerns, and that decisions should not involve a risk of detriment to the fund. However, the European Commission’s action plan on sustainable finance proposes that institutional investors and investment managers should consult their beneficiaries on their sustainability preferences and reflect those in their investment decision making, regardless of whether they are financially material. The European Commission plan states that

“institutional investors and asset managers do not sufficiently disclose to their clients if and how they consider these sustainability factors in their decision-making. End-investors may, therefore, not receive the full information they need, should they want to take into account sustainability-related issues in their investment decisions.”

I call on the Government to adopt the action plan in full; the Minister intervened earlier to say that the Government have only partially adopted it.

Pension savers should be given the greatest opportunity to engage with decisions about where their money is invested. As I said, younger generations want fully fossil-free pension options. Divesting from fossil fuels makes sense not just in terms of ethics and the climate, but as a sound long-term financial strategy As soon as I joined the parliamentary pension scheme, I also became a supporter of Divest Parliament. According to the latest annual report, as my hon. Friend Matt Western said, the fund includes stakes in BP at £ 733 million, Shell at £6.6 million, Rio Tinto at £3.67 million and Total at £2.93 million. Our own funds are being invested in those companies. It is time our own trustees heard our voices in this debate and in this place, divested our pension funds and reinvested in renewables and clean tech for our future and for the planet.

Photo of Derek Thomas Derek Thomas Conservative, St Ives 3:10 pm, 22nd May 2019

In 2018, the Government said they would update the law to require trustees to consider the impact of their investment on a changing environment. That has now been implemented. I congratulate Sir Edward Davey on securing this debate, He clearly set out the changing environment in the world of fossil fuel companies. Pensions funds are investments for many years. Our job in this place is to ensure that people who invest in a pension fund, but who do not necessarily have the power to decide where their money is invested, can be confident that their pension is secure and will provide the retirement that they expect.

Is a pension fund in a fossil fuel a sound investment? Evidence suggests it is not. The Government, for example, are introducing a ban on carbon-fuelled new cars in 2040. Calor, which I met last year, has committed to 100% BioLPG by 2040. This month, a whole week went by in which no energy generation came from coal-fired energy plants. Our focus should be on ensuring a secure future for pension fund savers, and investment in fossil fuel does not provide that. It should also be on the choices that pension fund owners want to make. Many employees have no choice in where their pension contributions end up, and increasing numbers of people would be horrified if they thought that the funds they hold were invested in fossil fuels, when at home they do all they can to reduce their carbon footprint.

I heard what was said earlier about the need to invest in companies for research and development to provide cleaner and carbon-free fuels. I am sure that, given a choice, people would welcome that, but they need to be given a choice about where their funds end up, and they need their funds to be secure and invested in something that they feel comfortable with. The Government have a real opportunity to support employees and to ensure greater transparency in where their money ends up and where the pension funds put their money, as well as greater choice in pension markets. Empowering consumers will have a greater impact when it comes to caring for our natural environment.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy) 3:13 pm, 22nd May 2019

I congratulate Sir Edward Davey on securing this debate. I think he slightly understated the carbon bubble in his opening remarks. The carbon bubble—basically the evaluation of assets that we know will never be realised—is not something that might burst in the not too distant future. It will inevitably burst because energy companies have systematically overvalued their assets and put them on their balance sheets. Not only will the historical overvaluing be in question, but all the valuing for the future will be in question, basically in line with where we now know we have got to go on net zero in our economies.

I prefer to call the carbon bubble a carbon boil. I am afraid the image is rather poor, but what we can do with a boil is lance it before it bursts, and that is the exercise we should be engaged in right now. The suggestions that the right hon. Member for Kingston and Surbiton put forward for doing that were sound. However, pension funds are complicit in the carbon boil/bubble because, by and large, they consider their fiduciary duty to be about getting the best for their pensioners over the next few years. They do not generally look at the long term, and do not think they are required to do so as far as their funds are concerned. The Governor of the Bank of England recently described it as

“the tragedy of the horizon”.

Photo of Richard Graham Richard Graham Conservative, Gloucester

To reassure the hon. Gentleman and others, it is perfectly possible for pension fund trustees to take the view that their fiduciary duty of obtaining good returns to deliver the pensions expected is not incompatible with taking into account huge amounts of other issues, including climate change. It is important that we all recognise that. We have a duty to look at that as well.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

I agree with the hon. Gentleman that some pension funds are beginning to take a different view. Indeed, that different view is becoming more possible, but the general consideration of the fiduciary duty remains a short-term gain for pensioners in the funds. Of course, the people setting out on their working lives will not get the benefit of those pension funds for 30 or 40 years. During that time inevitably we have to move to the net zero carbon economy. It is therefore essential that pension funds have a duty to look at the long term.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I want to help the hon. Gentleman on one point. He needs to understand that the ESG regulations are not voluntary, as Sir Edward Davey suggested. They are mandatory. If the trustees fail to follow them, specific sanctions follow.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

My understanding of the 2018 regulations is that it is mandatory for people to look at such things, but not mandatory for people to do things. That is the difference. In fact, I welcomed the regulations.

Pension funds should in future have a duty to protect the long-term value of the funds as well as consider the short-term issues of making money for their pensioners. We therefore need to clarify in law the fact that pension funds have a duty to protect the long-term value of the funds. Indeed, a recommendation that the Environmental Audit Committee made in its 2018 report has not been acted on, even though those regulations were introduced. That is something we need to move to urgently.

Having said that pension funds tend to invest in bonds and various other things that are primarily about energy bonds, on the assumption that there will be value, which we know will not be there in future, there is then the question of moving towards investment in things that do make a difference to climate change. Pension funds have a genuine problem in terms of the Solvency II regs, which tend to guide pension funds away from investing in the schemes that are capital-intensive up front and revenue less intensive behind, that are at the heart of the green investment revolution.

We need to do two things: first, make it much easier for pension funds to invest in long-term schemes, and secondly, ensure that they have a duty to ensure that they do not invest in short-term schemes. I have addressed the practical aspects of what pension schemes have done. I have not touched on the moral aspect. We simply have to leave dirty energy in the ground. We have got to invest in clean energy for the future, and pension funds ought to be at the front of that. If pension managers take that view in addition to the legal responsibilities that they have, I am sure they will go a long way to helping the green revolution succeed.

Several hon. Members:


Photo of George Howarth George Howarth Labour, Knowsley

Order. To get the three remaining speakers in and leave enough time for the Front Benchers, and a moment of two at the end for the right hon. Member for Kingston and Surbiton, I shall have to reduce the time limit further to three minutes.

Photo of Sarah Newton Sarah Newton Conservative, Truro and Falmouth 3:20 pm, 22nd May 2019

I congratulate Sir Edward Davey on securing this important debate. I could not agree more that we must harness the power of capitalism as a force for good—because it can be a force for good. I agree that wholesale nationalisation is the wrong approach to the emergency. It will not provide the creativity, investment or innovation that we need to tackle what is a huge problem.

I agree with my hon. Friend Derek Thomas that it is important to give people information, so that they can make informed choices. They will want to know not only that their pension investments are working to secure them income in retirement, but that those investments are a force for good in the world. That is especially true when people are making so many sacrifices at home to reduce their carbon footprint.

I pay tribute to the Minister who, I know, completely gets this issue. In an article in The Times today he talks about the potential to be gained from unlocking the huge investments in pension funds to tackle climate change, and he makes a good case. Picking up on that, I ask him to work with his colleagues, particularly in the Department for Business, Energy and Industrial Strategy, and to look at the opportunity to harness through local industrial strategies the potential for investment by local authority pension schemes in clean growth.

We have set clean growth at the heart of our economic growth in Cornwall. Cornwall Council sits on a pension fund well in excess of £1 billion. Many people in Cornwall would like to think that the council was making safe, wise decisions by creating well insulated, environmentally friendly new homes and communities that are affordable for people to live in. They would want it to invest in the excellent, growing, high-tech, clean growth industries in Cornwall, as well as in existing organisations such as Kensa, which is Europe’s favourite supplier of ground-source heat pumps. There are plenty of organisations that would deliver good returns for the pension fund in Cornwall, and which would use the money locally for the benefit of local people. There is an opportunity through the industrial strategy for the local growth strategies to link the need for finance with the need for local growth.

I ask the Minister to bear in mind what has been said today and give local authorities clearer guidance, so that they can meet their responsibilities and use the huge opportunity of their pension funds to deliver the clean growth and decent homes that people in their communities want.

Photo of Thangam Debbonaire Thangam Debbonaire Opposition Whip (Commons) 3:22 pm, 22nd May 2019

It is a pleasure to serve under your chairmanship, Mr Howarth. I shall cut from my speech anything that anyone else has already said, and try to focus on things that I hope are new to the debate.

The parliamentary contributory pension fund, into which I believe we all pay, continues to hold fossil fuel investments, despite the wish of many parliamentarians and many of the people we represent. However, it is not easy to find out the full list of PCPF holdings. The 2018 annual report lists only the top 20 holdings, which account for only 21.6%, so I wrote last week to the trustees with a specific request, as a pension contributor, for a complete list so that I could prepare for the debate. I was disappointed by the response that I got today, informing me of what I already knew—that the fund publishes the top 20 holdings—and giving me a link to the website, which I was already aware of. The response mentions fiduciary responsibilities, and I accept that point, but it ignores the long-term threat of fossil fuel use to the economy.

The website also mentions environmental, social and corporate governance, but the documents available on it do not appear to me to provide any explanation of what efforts have been made to identify non-fossil fuel holdings that could replace the fossil fuel holdings with an equivalent financial benefit. It is disappointing that my specific request for information on the other 78.4% of the holdings was not met. I respectfully ask the PCPF to provide full, detailed disclosure after the debate. If I am mistaken about where it is on the website, I ask forgiveness, but I have searched and searched, and cannot find it.

People around the world are wising up to the risks of fossil fuels, and my constituents want me to do everything I can to get Parliament’s contributory pension fund to lead by example. The University of Bristol has already done so by divesting from its climate change-inducing fossil fuel funds. Investing in fossil fuel funds is, as we all know and as has been said, bad for the planet and for business. I do not want my pension to be invested in funds that jeopardise the future of the planet and the future of my nephews and nieces and their children. As a pension fund contributor I urge the trustees to change their investment strategy and to be fully transparent. In responding to the climate change emergency Parliament must get its own house in order.

Photo of Helen Hayes Helen Hayes Labour, Dulwich and West Norwood 3:25 pm, 22nd May 2019

It is a pleasure to serve under your chairmanship, Mr Howarth. I congratulate Sir Edward Davey on securing this important debate.

I commend the climate change protesters who have taken to our streets in recent weeks, including many schoolchildren from my constituency who will be out again on Friday. They have succeeded in putting climate change where it should always have been, at the top of the political agenda. They are right to protest and they are right not to rest until the action that we need is taken and carbon emissions are falling.

It is good that Parliament has declared a climate emergency, but we need action now that is commensurate with an emergency. Divestment is critical to that. One of the essential systemic changes that we need to make is to look at the big flows of investment finance in our economy, divert them away from harmful, polluting and exploitative fossil fuels and reinvest them to scale up sustainable zero-carbon change.

Photo of Anna McMorrin Anna McMorrin Labour, Cardiff North

My hon. Friend is making an excellent speech. There are hundreds of billions of pounds in UK pension schemes, and asset owners sit on top of the investment scheme without realising the financial power that they wield. Should not it be made mandatory, so that there can be a transition to a low-carbon economy, for them to examine the situation and take action on the climate risks?

Photo of Helen Hayes Helen Hayes Labour, Dulwich and West Norwood

My hon. Friend is absolutely right. To my mind, divestment is a no-brainer. As far as we can we must keep fossil fuels in the ground. We do not have the luxury of doing anything else. Yet for as long as the fossil fuel giants can draw down big investment finance they will keep extracting and selling their damaging products. As long as the development of sustainable alternatives is starved of investment finance, limiting their availability and keeping their cost high, consumers will remain addicted to fossil fuels. It is that simple.

Divestment is a big, systematic change that we can make now. I pay tribute to both local councils in my constituency, Lambeth and Southwark, which were among the first local authorities to divest their pension funds from fossil fuels. I am proud of their commitment, which shows that divestment is completely possible within the strict fiduciary duties of pension fund trustees. More than that, retaining funds in fossil fuels is increasing the risk of those investments over time. At City Hall Sadiq Khan is also showing great leadership on divestment, divesting the Greater London Authority’s assets, working to support boroughs and encouraging them to divest.

The parliamentary pension scheme remains invested in fossil fuels. Five of the top 20 investments of our pension fund are in fossil fuel companies. The pension fund trustees have been far too slow to react to calls for divestment and are still refusing to do so, despite the fact that more than a third of MPs have written to them about it. The divestment of our pension funds is a straightforward leadership action that Parliament should take. No increased risk is entailed and in fact the opposite is true. The climate change emergency demands it.

Finally, we need the law to drive a further change in divestment. Although arguably the law currently requires pension fund trustees to invest in line with the Paris agreement, new legislation is needed to clarify and strengthen the duty. Reporting of fossil fuel-based investments should be mandatory and there should be a duty on all investors to report on the alignment of their portfolios in relation to the Paris agreement. This cannot be left to chance. We will not tackle climate change by retaining the status quo and fiddling around the edges. We need systemic change and it must start with our own leadership and a legislative framework that drives investment finance nationally and globally away from fossil fuels and towards the sustainable investment we need.

Photo of Patrick Grady Patrick Grady SNP Chief Whip 3:29 pm, 22nd May 2019

It is always a pleasure to serve under your chairmanship, Mr Howarth, and I congratulate you on managing to fit in nine Back-Bench speeches, as well as the one by Sir Edward Davey and several interventions. That demonstrates the importance of this issue to hon. Members across the House and their constituents.

I congratulate the right hon. Member for Kingston and Surbiton on securing the debate, and on framing it in such an interesting way that enabled us to consider both the ethical and the financial risks of investment in fossil fuels. As well as risks, however, there are immense investment opportunities. We have an important chance to get this right and to build a cleaner, greener and more sustainable future for us all.

The subject is of considerable concern to many of our constituents—I have certainly received emails about it, and people have come to my surgery to speak to me, which is always a demonstration of the importance that people attach to an issue. The divestment campaign has been running for a considerable time. In 2014 there was a successful campaign at the University of Glasgow in my constituency, since when the university has made a concerted effort to divest away from polluting and fossil fuel technologies.

As the extremity of climate events increases, the urgency becomes clearer and the momentum behind the campaign continues. Hon. Members have mentioned that energy companies and other such industries are willing to engage with that momentum, but they also need support and incentives. The declaration of a climate emergency is crucial because it helps to reframe that policy debate. We in Parliament have declared a climate emergency, civil society is doing so, and Glasgow University and Glasgow City Council have done so. The Scottish Government and the SNP have also made that declaration, but I think I am right in saying that the UK Government have not done so yet. They may have accepted the motion that was passed but they have not yet declared a climate emergency, and that is a missed opportunity to show leadership.

Photo of Deidre Brock Deidre Brock Shadow SNP Spokesperson (Devolved Government Relations), Shadow SNP Spokesperson (Environment and Rural Affairs), Shadow SNP Spokesperson (Wales)

Does my hon. Friend agree that consistent, reliable policy frameworks from Governments are essential when encouraging investors to take up the ethical investment opportunities that I know they are keen to take up?

Photo of Patrick Grady Patrick Grady SNP Chief Whip

My hon. Friend is right, and I hope we will hear that point from the Minister.

Difficult decisions will have to be made. The Scottish Government have halted their plans to cut departure tax at airports, and the First Minister said in the Chamber that we will have to look again at our stance on the expansion of Heathrow. Those are the ways that we can begin to make that just transition, and that is the importance of the Divest Parliament pledge, which I and the vast majority of SNP Members have signed and are happy to endorse.

Photo of Patrick Grady Patrick Grady SNP Chief Whip

I am conscious of the time, and as the Chair said, we must ensure there is time for the Minister and shadow Minister to respond.

We must lead by example, and starting with our own pension funds is one of the best ways to do that. Like Kerry McCarthy, and others, I hope that the trustees are listening to this debate.

It is right to place an emphasis on both the ethical and the financial risks. The ethical risks are there for us all to see. The impact of over-reliance on fossil fuels over the years most affects people in developing countries, whose consumption of fossil fuels has been the least, but who are feeling the impact of climate change first and hardest. As David Warburton said, this is not just about financial prudence; there is also a financial logic to switching investments towards clean, green and diversified technologies. Even without a reduction in emissions for reasons of climate change, fossil fuels are a finite resource, and one day they will run out. We must make the transition.

While we still use fossil fuels, we must do so as cleanly as possible. That means investment in things like carbon capture and storage, on which the UK Government have again been woefully lacking. Governments have a responsibility to create a climate-friendly investment environment. The Scottish Government are doing their part with solid environmental and ethical considerations and procurement guidance, as well as the establishment of the Just Transition Commission, which will seize those transition opportunities while ensuring that communities are not left behind as they were during the deindustrialisation of the 1980s.

The UK Government must play their part, and we heard interesting proposals from the right hon. Member for Kingston and Surbiton about aligning decisions to the Paris agreement targets. I suggest that aligning decisions to the sustainable development goals would also make a lot of sense. In reserved areas, the Government should fully operationalise carbon capture technologies and accelerate action to decarbonise the gas grid. They should redesign vehicle and tax incentives to support industry, and commit to adhering to future EU emissions standards, irrespective of our future status within the EU. They should reduce VAT on energy efficiency and home improvements, and support the renewables industry more generally. All that would create a more incentivised investment environment for new, clean and green technologies.

We should listen to the future generations and climate change school protesters. If they wish to claim a pension in a sustainable environment in decades to come, that will require action now to tackle climate change and build a financially viable and sustainable pension fund. For them we must seize this opportunity and look not just at financial and ethical risks, but at the financial and ethical opportunities of a cleaner, greener and more just world.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Work and Pensions) (Employment) 3:35 pm, 22nd May 2019

It is a pleasure to serve under your chairmanship, Mr Howarth. I thank Sir Edward Davey for securing this vital debate. I also thank the nine Members who made speeches, as well as those who intervened.

It is not every day that I agree with the Liberal Democrats, but we certainly have common ground on this issue. We are in a climate emergency, and when we talk about moving towards a greener economy, we must be clear that the time for debate and discussion alone has passed. It is now time for clear, concrete and urgent action. As my hon. Friend Helen Hayes so powerfully argued, we must make no mistake: this is a climate emergency; this is a crisis.

One could argue that climate change has never been so prominent in public consciousness and political discourse. Despite the Brexit-related dramas in Parliament, which still continue, between 15 and 25 April, climate change was high on the news agenda in response to Extinction Rebellion protests in London, a major BBC documentary presented by Sir David Attenborough, and the visit to London of a Swedish schoolgirl. They led the way for many of us.

Over the past 12 months, according to pollsters, the environment has risen in public concern. In a YouGov poll conducted on 29 and 30 April, 24% of people placed the environment among the top issues facing the country—about the same level as concern about the economy and immigration. That is a stunning development. We know from our postbags the levels of concern among the public about the climate emergency. Nothing short of a major transformation from fossil fuels to renewables will be good enough. Changing the ways that pension funds invest will not solve the crisis on its own; it must be part of a much wider approach—a new green deal, or a green industrial revolution. We have made some progress but, my God, we need to make considerably more if we are genuinely to tackle this emergency.

My hon. Friend Matt Western highlighted the fact that the Labour-led Southwark Council has moved £450 million into passive funds that track low-carbon and fossil-free indices. It has also invested £30 million in Glennmont’s green energy fund, which invests in western European wind and solar companies. Many trade unions—I declare an interest as a member of Unison—have produced excellent and accessible guides to divesting away from fossil fuels, and I know that has been welcomed by representatives on local government pension committees and schemes up and down the country.

Parliament has started to take this issue more seriously and put its own House in order. In June last year, 11 hon. Members, including the shadow Chancellor, called for Cambridge University to remove its £377 million fossil fuel investments. In addition, 244 serving and former MPs have signed the Divest Parliament pledge, calling on the trustees to phase out investments in fossil fuel companies. The trustees are developing a climate change investment policy, but not quickly enough, as highlighted powerfully by my hon. Friend Thangam Debbonaire. We want that policy to commit to phasing out investment in fossil fuel companies in the earliest timeframe possible and to reinvest the money in funds aligned to the Paris agreement.

This country’s pension assets, as highlighted by my hon. Friend the Member for Warwick and Leamington, total some £2.8 trillion. Pension savings should be at the forefront of the fight against climate change. Pension savers have money invested for the long term, so it is particularly exposed to climate risks, as powerfully argued right across the Chamber. This concern is now relevant to more of us than ever.

Given the clear threat that climate change poses, we would all hope that it would be the norm for pension schemes to manage the risks. Unfortunately, research from the charity ShareAction finds that, for many, their retirement savings are unlikely to be sufficiently protected against climate risks. In a survey of some of the UK’s largest defined-contribution corporate pension schemes, just two of the 15 participating schemes had changed their default investment strategy specifically to reduce the exposure of employees’ savings to climate change risks. Although ShareAction found that a handful of schemes are considering further policy developments in this respect, the fact that a gulf exists between the strategies of schemes means that workers face a lottery from one job to the next as to whether their savings are sufficiently protected against climate change.

As the Minister stated in an intervention, the new pensions investment regulations, in force from October 2019 and to be strengthened in 2020, go some way towards addressing the issue. Scheme trustees will need to update policies to show how they take climate change into consideration as a financial risk. However, as my hon. Friends the Members for Norwich South (Clive Lewis) and for Southampton, Test (Dr Whitehead) argued powerfully, we need to go considerably further.

Financial regulators have a major part to play. Trustees in charge of managing schemes need enhanced guidance from the Pensions Regulator on how best to manage climate risks. The Financial Conduct Authority, in charge of regulating contract-based schemes, needs to provide clarity on the need for consideration of and reporting on climate risks, through both investment and stewardship, to ensure that no savers face weaker protections because of the scheme in which their employer happens to have enrolled them.

Greater transparency about the actions that schemes are taking to manage the risks should result in better decisions being made.

Photo of Luke Graham Luke Graham Conservative, Ochil and South Perthshire

The hon. Gentleman is making a very good point about transparency. A large reform is going on in the audit industry at the moment. Does he agree that there is an opportunity for us to look at the whole of financial services and financial infrastructure and look at how we value investments, so that we value intangibles along with tangibles and ensure that our environmental and sustainability investments are getting their appropriate value? This is not just a trade-off between short-term returns and long-term investments; we can achieve both if they are valued correctly.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Work and Pensions) (Employment)

That is a very good point, which I will come on to.

Pension schemes should be required to report on their management of climate risks in line with the Task Force on Climate-related Financial Disclosures. Transparency could also be enhanced by mandating scheme member representation—I think that my hon. Friend Alex Sobel argued for this—on the governance boards of the new auto-enrolment schemes, as well as by requiring pension schemes to consult their members on key policies.

We need to send clear signals that tackling climate change and other environmental, social and governance risks is not distinct from the core purpose of financial markets, but an integral part of it, as Luke Graham argued in his intervention. Of course, as we divest from fossil fuels, we must ramp up investment in clean and green technology. Labour has set out plans to fit 1.75 million homes with electricity-generating solar photovoltaic panels, creating thousands of quality skilled jobs across the UK. That is a Labour green deal that will shift energy generation via renewables to 85% by 2030. It will provide a major boost to an industry that is still recovering from the effects of the coalition Government’s ill thought out slashing of feed-in tariffs, which was such a blow to a growing and vital industry.

Photo of Anna McMorrin Anna McMorrin Labour, Cardiff North

Does my hon. Friend agree that to really address this issue, we need legislation like that in Wales, the Well-being of Future Generations (Wales) Act 2015, which is transforming how the public sector takes decisions? Legislation like that could and would address this very issue if we had it in the UK.

Photo of Mike Amesbury Mike Amesbury Shadow Minister (Work and Pensions) (Employment)

I do agree with that point, which was powerfully made.

Labour will transform corporate environmental responsibility by making compliance with key environmental criteria a condition of firms listing on the stock exchange, so we will be applying that more broadly. Of course, to deliver the change needed to respond to this emergency, all parties need to show leadership.

Does the Minister agree that we are in a crisis, an emergency, and that nothing less than transformational, revolutionary change is needed? If that is the case, does the Minister believe that rolling out the red carpet for the current President of the United States, who is perhaps the most high-profile and influential denier of climate science in the world today, sends the right message? Will the Minister look at giving further strength to the ESG regulations? They are a welcome step forward, as we have already said, but we could go considerably further. Will the Minister offer Government support for the parliamentary schemes divesting from not only fossil fuels but environmentally damaging investments more broadly and doing so as quickly as possible? Finally, if the Government support the move away from fossil fuels, why do they continue to support the fracking revolution, as highlighted in their party’s 2017 manifesto? We need more than warm words. We need emergency action now.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions 3:47 pm, 22nd May 2019

This Parliament accepts that there is a climate emergency, and this debate, which I am delighted so many colleagues have embraced this afternoon, has focused on the following key issues: the change that clearly is taking place in our climate; the role of the consumer; the choices that are available to the individual parties that we are dealing with; and, ultimately, the role of capitalism and its ability to assist in addressing these particular problems.

We should trumpet the success of successive Governments of different persuasions, leading up to the coalition and this Government, in leading the way in the G20 and reducing our CO2, and we should celebrate the quadrupling of our renewable capacity, but we clearly must do more. We should celebrate the fact that, as my hon. Friend Derek Thomas said, on the May bank holiday Britain had burned no coal for electricity for a week—the longest period without coal since the industrial revolution.

Although we celebrate these good things, they are patently not enough. Although we will plant more forests, recycle more and, crucially, try to engage our consumers, our citizens, our constituents to change their behaviour, we do, I suggest, need capitalism to save the day. I agree with my hon. Friend Sarah Newton that we need to urge local authorities to focus on the clean growth strategy that has been set out by the Government to address the way we do housing and the way we do energy on a localised basis. I believe very strongly—any Conservative will make the case—that capitalism is a force for good, because we need technological innovation to solve the climate change issues, and innovative start-ups will be needed to address the access to capital and the changes that are required.

Photo of David Duguid David Duguid Conservative, Banff and Buchan

Many hon. Members have spoken about the need for transparency regarding the kinds of companies that are being invested in. Does the Minister agree that that transparency should include the work already done by large oil and gas companies to invest in the innovation he is talking about? It is not only small start-ups that do this innovation; the large companies with large resources behind them are already investing in it heavily. As Sir Edward Davey mentioned, the 1.3% invested by the 13 or so companies that are part of the oil and gas climate initiative works out at approximately $100 million a year. That is a very large number, even though the percentage sounds small.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I accept my hon. Friend’s point. The crucial point is that natural gas had been one of the biggest parts of reducing carbon dioxide in the electricity sector. Hydrogen derived from natural gas will decarbonise heating for homes and transport. The large companies are leading the way on carbon capture and storage. We must work with them to ensure that the successes, which we all want to see, continue.

We can see the changes that are taking place. Individual companies must answer for themselves. Last year, Shell, one of the largest companies that we are debating, agreed to link its executive pay to its carbon emission targets, in direct response to particular shareholders. The Minister for Energy and Clean Growth, my right hon. Friend Claire Perry, would be here if she could, to make the case for the Government’s clean growth strategy and the green agenda. Like her, I urge individual consumers—anybody who has a particular pension—to make the case to their trustees as to how that is being invested.

Several hon. Members:


Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I am going to make some progress and then I will try to take the greatest hits—bear with me one second.

I accept that the technological changes require capital, long-term thinking and a lack of political agenda. I strongly believe that the pension industry has those attributes. I urge the House to accept that the Government’s regulations—namely the ESG regulations, which come in this year, but were passed in September 2018—which require a pension fund to update its statement of investment principles and take into account environmental, social and governance regulations, are key to the change to the strategic progress of investment.

To address the point made by Clive Lewis, those occupational pension schemes regulations require that trustees must—the emphasis is on “must”—set out their policies on environmental, social and governance matters, including climate change, and how they engage with the companies in which they invest. Those regulations also introduced a requirement for trustees of DC schemes, where the member bears the financial risk of poor investment decisions, to report on how their investment policies are being put into action and make all of that information publicly available online.

For too long there has been a perception by too many trustees—I am happy to clarify this as a Government Minister—that the environmental practices of the firms they invest in are purely ethical concerns, which they do not need to worry about: that is utterly wrong. Aside from the ethical considerations, there are real financial risks resulting from climate change. With the long-term horizons of pension investing, trustees must now consider that when they set out their investment strategies. Trustees who do not consider those matters will be breaching their statutory and potentially their fiduciary duties not only to current but future members.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I will give way to the hon. Gentleman, who has not had a chance to speak.

Photo of Ben Lake Ben Lake Plaid Cymru, Ceredigion

There is consensus that divestment from fossil fuels makes both financial and environmental sense. Further to the point that the Minister has just made, does he think that those changes will be sufficient to ensure that the industry actually makes that transition, or does he envisage further measures in the future?

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I will come on to some of those particular points. In terms of regulatory guidance, which has been raised by several hon. Members, there is no doubt that the Pensions Regulator is planning to publish further guidance on managing the climate change risk in advance of those regulations, which come in to place in October. A key point is that non-compliance with those regulations can potentially lead to sanctions from the Pensions Regulator, which is acutely mindful of its obligations and what it needs to do to address this particular point.

As a Government, we will respond shortly to the advice from the Energy and Climate Change Committee on the target for net zero emissions by 2050. That advice was only published two weeks ago. Colleagues will be aware of the 25-year environmental plan, which has been set out in detail. It commits to using resources from nature more sustainably and effectively, and achieving a clean air, water and wildlife approach.

Photo of Alex Sobel Alex Sobel Labour/Co-operative, Leeds North West

The Minister began by saying that Parliament has declared a climate emergency. Do the Government also recognise and declare a climate emergency? His remarks on the recent report from the Energy and Climate Change Committee indicate that the Government must declare a climate emergency.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

The hon. Gentleman and I went into the same Lobby when we voted on that matter. He has heard that the House gave universal support to the debate that was taking place. I am not here to make policy on behalf of the whole of the Government, but the Government will respond formally to the 2 May report shortly. He will have to bear with us until that stage.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I will not give way again, because I have very little time left.

I want to address a couple of points made by Sir Edward Davey. He asked whether we are creating a coalition of the willing. I strongly suggest that we are. We are working with the Institutional Investors Group on Climate Change, ClientEarth, ShareAction—which I have met on several occasions—and the UK Sustainable Investment and Finance Association. There is a serious amount being done to ensure we are aligned with the Paris agreement. The widespread global commitment to the Paris agreement suggests that trustees have a responsibility to align their investment strategies with its aims.

However, it is fair to say that there is no definitively agreed consensus on what being aligned to those aims of being below 2° mean for a specific pension fund and its asset allocation. That is why I am delighted to see the initiative of the Institutional Investors Group on Climate Change, which is developing a common understanding of what such alignment means for pension schemes, and the Government will work with it on that point.

Green finance is a key priority for my right hon. Friend the Minister for Energy and Clean Growth, who set up the green finance taskforce which, with the clean growth strategy, will drive economic growth as part of industrial strategy, to ensure that the UK remains a driving force in enabling the global transition to a low-carbon economy. A green finance strategy paper will be launched later this year, which will set out the Government’s green finance objectives on an ongoing basis.

I want to talk about consumers. It is absolutely the case that members can make individual choices. They can choose to move their individual pension into a self-selected fund that aligns with their own objectives, such as an ethical fund. We massively support such an approach and feel that it is the right thing to do.

On transparency, which my hon. Friend David Duguid mentioned, the Government intend to announce further transparency measures on the topic of responsible investment in the coming weeks, in respect of the shareholder rights directive. This Government absolutely accept that there is a climate emergency and we are addressing this. I thank the right hon. Member for Kingston and Surbiton for bringing forward this vitally important debate, which all of us have engaged with and embraced as the right way forward. I look forward to updating the House on further developments, particularly in October after the regulations kick in.

Photo of Edward Davey Edward Davey Liberal Democrat Spokesperson (Home Affairs) 3:58 pm, 22nd May 2019

I thank everyone who has contributed to this debate, which has been really good. There is some degree of consensus emerging. I agree with what the Minister said on carbon capture and storage. I was disappointed that the former Conservative Chancellor, George Osborne, got rid of the CCS projects that I had been developing as Secretary of State for Energy and Climate Change, particularly the gas CCS which was a world-leader. I regret that, because I think it was an extraordinarily bad decision for the gas industry.

I want to return to the issue of consensus. We need to act. I set out a five-point plan today. There were other ideas. I hope the Government will listen to those ideas. While the ESG guidelines are helpful—I know some of the work that the Minister for Energy and Clean Growth is putting forward on green finance—I think we have to be bolder and go further. The Minister has heard that today.

In the context of the role of the UK and the City of London internationally, we need to go further. If we can lead from the City of London, we can decarbonise capitalism not only here, but globally. That will be the biggest contribution that Britain can make to tackling global climate change.

Question put and agreed to.


That this House
has considered financial and ethical risks of investments in fossil fuel companies by pension funds.