Policy Exchange Climate Change Speech
Harnessing the power of pensions to help achieve net zero
It is great to be here at Policy Exchange today, physically but with people on the internet as well.
I want to talk about how pensions can be the superpower in delivering prosperity for people and the planet in our race to net zero. It’s a race that the whole world has to win together.
As the Member of Parliament for Suffolk Coastal and a former environment minister, I am all too aware that while climate change is a global challenge, the consequences will be most visible in local communities.
In Suffolk we have already seen it in the agricultural seasons shifting, which we can – and have – adapted to.
But left unchecked and with no action, the impact of climate on our sea waters and land, as sea levels rise over the coming decades, would leave parts of Suffolk and other coastal areas of the UK underwater and the potential impact on farming, food, lives and livelihoods is real and tangible.
The climate extremes we have seen around the world this year are unprecedented in their scale, ferocity and frequency – something that will only get more common if we do not act.
Climate change is happening and it is accelerating, and that is why the world needs to work together to protect our planet.
And the UK has been leading the way – in terms of our ambition – we were the first major economy to legislate on getting to net zero by 2050 and in our action – we have gone from generating 40% of our electricity from coal in 2012, to just 2% today.
We will end the use of coal power entirely by 2024. We have developed the largest offshore wind sector in the world, supporting thousands of jobs.
So there is much to be proud of when you look at what is already being done and even more to be optimistic about when you look at commitments being made on what more we can do across every sector to combat climate change.
COP26 in Glasgow sets the stage for global leaders to step up and deliver on the commitment made in Paris six years ago to limit global temperature rises well below two degrees, aiming for 1.5 degrees.
To keep 1.5 alive, we are fighting on every front, through:
• innovation and technology
• cleaner transport
• protecting and restoring our environment
• more renewables
and by fully harnessing the power of green finance to invest in and accelerate action on these and other fronts to help us reach our destination of net zero in time.
The role of finance and Environmental, Social and Governance standards is a focus for COP. As its President, Alok Sharma, has said: ‘without finance the task ahead is near impossible’. Public finance is important and we continue to invest billions into a range of schemes. But public money alone will never be enough.
That is why private finance and investment is a central part of the Prime Minister’s ten-point plan for our Green Industrial Revolution – and huge efforts are being made to get finance flowing to climate change solutions – work led by Mark Carney.
And as you saw from our International Investment Summit this week, we are rolling out the green carpet for international investors, mobilising markets and the private sector – generating nearly £10 billion of new investment and deals that will support green growth and create an estimated 30,000 UK jobs.
But today, I want to focus on one part of this country’s formidable financial sector that has huge investing power, and that is – pension funds – and the opportunities there are for greener pensions and how they can help us reach net zero.
Pensions provide millions of people with a secure financial footing for later life and I am proud of the work we have been doing to get more people saving and to make the pensions system safer, simpler, more transparent – and greener.
Over 10 million more people are now saving for their retirements thanks to automatic enrolment – and they are saving more, with contribution rates having risen to 8%.
We have created a new type of pension scheme – Collective Defined Contribution. We are progressing our pension dashboards.
And through the recent Pension Schemes Act, we have introduced a range of new duties for those involved in running pension schemes, as well as created new powers to protect pension savers.
I really want to take this opportunity to thank Pensions Minister, Guy Opperman, who is here today, for his diligent work and commitment to improving the pensions sector. He really has done a tremendous job.
It is a sector that has a massive part to play in helping the UK get to net zero – and across the industry there has been leadership and important progress made:
• around 85% of Defined Contribution pension savers are in a scheme with a net zero target
• and six of the top ten Defined Benefit schemes, with total assets of over £250 billion, have made net zero commitments.
This is a vast improvement, even from 12 months ago. And it is fantastic to see the likes of Nest, which covers a third of the UK’s workforce, committing £250 million to renewable projects including solar and onshore wind in the UK and Europe.
But we need to go further to harness the full power of pensions to get savings for the future truly shaping our green future – and those of generations to come.
If you put all of the UK’s occupational pension schemes together, their combined total assets come to nearly £2 trillion – a figure boosted by the continuing success of automatic enrolment.
That makes the trustees of pension schemes – who we entrust with our savings – the largest single group of institutional investors in the UK, with significant influence over the flow of investments in the economy.
Look beyond the value of UK pension schemes, and you are talking about tens of trillions of pounds of pension fund investment globally.
With the capital clout to drive investment in things like green infrastructure and technology, pension schemes can become a superpower in the fight against climate change.
At the same time, they are also vulnerable – exposed to the systemic financial risk inherent in our transition to a net zero economy.
And that is why we have been helping pension funds mobilise so they are both better protected from, and can play their part in tackling, climate change.
We know that savers care about where their retirement savings are invested with one survey showing that 70% of pension scheme members are interested in responsible investments that can make a positive difference to the planet.
As well as being inspired to take action, investors also need to be informed. That is why we are helping arm scheme members with the right information so they can get a better, more informed view of how green their scheme’s climate credentials really are.
This month, we are the first country in the world to legally require trustees to assess – and publish – the financial risks of climate change within their portfolios.
This is in line with recommendations from the Taskforce on Climate-related Financial Disclosures – or TCFD – which was set up in 2015 to improve and increase reporting of climate-related financial information.
For the first time, trustees are being held to account publicly – by putting climate risks and opportunities at the heart of their governance and decision-making processes. And – crucially – through the requirement to publish. This gives members the information they need to ask questions, challenge and make their views known.
We had previously said we would consult on a further reporting metric: alignment with the Paris Agreement. And just last week, TCFD provided updated guidance recommending financial institutions describe the extent to which the assets they own are aligned with the Paris Agreement. With the ink still drying on that recommendation, I can announce another climate first for UK pensions.
We are today setting out how we expect pension schemes to measure and report on how their investments align with the Paris Agreement. As the defining climate document of our time, it is on achieving 1.5 degrees that we will be judged.
To turn the words in the Paris Agreement into practical action, we need to embed it into every part of our lives, including our pensions. This new metric will be a powerful method for communicating in a simple and straightforward way a scheme’s progress in managing the transition to net zero and how exposed members’ savings are to risks relating to climate change.
Together with our proposed introduction of new standards that will require businesses to report on their environmental impact, we are putting sustainability at the heart of investment decisions that will boost the economy, protect the planet and support our transition to net zero.
I understand this is yet another ask of trustees, and it follows a busy period of wider reform and change, and I want to thank them for showing great leadership and for engaging constructively to make pensions safer, better and greener.
Let us be clear: managing the transition is not just about regulation and box-ticking. Done well, stewardship of pension schemes – that’s active and engaged management and oversight of the scheme’s assets – is crucial to securing good outcomes for hard-working pension savers – putting money away into their pension pots for their future and the future of the planet too.
As a hugely powerful tool in the industry’s response to the climate crisis and building on the recommendations of the Taskforce on Pension Scheme Voting Implementation – which DWP established in December last year – we are also consulting on new guidance around trustees’ stewardship activities.
This will help support trustees to monitor, engage, and where necessary, intervene on issues like climate change that may affect the value of investments.
Pensions may not always be at the forefront of our minds, but the changes we have made over the last decade have been hugely positive in helping people save.
Our latest reforms will empower savers to clearly see how their money is being managed by trustees – giving them the tools to protect savings from the effects of climate change and make the most of the opportunities from the transition to a low-carbon economy.
The measures may seem techy, but they are transformational – placing pension schemes further at the heart of our response to climate change and transition to net zero. I do urge other countries to follow the UK’s lead and I look forward to attending COP in just over a week’s time to further this important agenda.
The more pension scheme trustees invest in, seize and promote green opportunities, they reduce climate risk in their portfolios, and further harness the productive power of pension funds, helping propel us towards net zero and our greener, more sustainable future. A future that will safeguard people, our planet and deliver prosperity.
Our pensions can help us achieve that together.
Thank you very much.