Investment - Articles - Pension funds could finance GBP1tn to tackle climate change

Research by Phoenix Group and Make My Money Matter shows that, with the right reforms, the UK Pensions Industry could invest up to £1.2 trillion in climate solutions

 This is half the gross capital investment required to deliver the Balanced Pathway by 2035 and it is quadruple the £0.3 trillion that the industry is on track to invest based on current trends

 Report highlights barriers preventing greater investment in climate solutions related to both demand for finance and supply for financing and identifies strategies to overcome them

 Make My Money Matter research shows that action on this agenda is popular with many savers, as 12 million pension holders want their provider to invest more in businesses tackling climate change*

 Phoenix Group and Make My Money Matter to work with others in industry to drive forward a collaborative effort with government and regulators to unlock the potential of UK pension funds' investment in climate solutions, whilst always ensuring the best outcomes for pension savers

 Phoenix Group has partnered with Make My Money Matter and published a report, “Unlocking Investment in Climate Solutions”.

 This report, delivered with support from across the industry, 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 of “Unlocking Investment in Climate Solutions” 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. Phoenix retains a continued focus on securing the best outcomes for customers, including managing risk and helping savers make the most of the investment potential to optimise returns. In its plan Phoenix Group also pledged to be vocal in calling for action and convening stakeholders to drive the wider system change needed to reach net zero.

 Key findings

 The research finds 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. (See Figure A in Notes to Editors).

 Chris Skidmore MP, Chair, Mission Zero Coalition, said: “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. 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.”

 Main barriers to investment and strategies to unlock
 The report acknowledges that there is appetite across the UK pension industry to scale up investment in climate solutions, but notes that many pension schemes are struggling to match their ambition with action. The report summarises the two key barriers inhibiting progress as:
 i) 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.
 ii) 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:
 - 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:
 - 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 outlines 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, said: "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."

 Public Support
 Pension savers also expect action on this agenda. New research commissioned in September 2023, from Make My Money Matter and NEON indicates that in total, 12 million pension holders want their provider to invest more in businesses tackling climate change,. It’s also popular too. Two thirds (66%) of all pension holders support their scheme investing in renewable energy, while even more (68%) support investments in companies that protect natural habitats. For comparison, just 19% of pension holders support their scheme investing in fossil fuels.*

 Campaign for Change
 The report will catalyse activity from Make My Money Matter, Phoenix Group and peers across the industry to unlock the potential of UK pension funds’ investment in climate solutions. This work will include collaboration with industry on short term activities to drive an increase in investments, work with policymakers and regulators to begin to unlock some of the barriers restricting industry from going further and faster on this critical agenda, and raising awareness amongst the public of the power of pensions.

 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.”

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