Labour’s Green Plan to Seduce Pension Funds
The UK’s main opposition party is predicted to claim an emphatic win at the upcoming election on a bold climate agenda – and pension funds are being asked to fund it.
How do you pay for a multi-trillion-pound energy transition when you have no money?
That’s an awkward question facing the British Labour Party, which polls suggest is on track to win a landslide victory in the UK general election next week.
Most forecasts predict the biggest ever defeat for the incumbent Conservative Party, ushering in the first Labour government in 14 years – with a larger majority even than Tony Blair secured back in 1997.
But assuming the polls are right, Labour’s celebrations won’t last long. It stands to inherit a cash-strapped, heavily indebted Treasury, a structurally weak economy, and a long list of competing demands – from a health service in crisis, to a national housing shortage, to an ageing population.
All this massively complicates Labour leader Sir Keir Starmer’s ambitious climate agenda.
Still, his green rhetoric has not diminished. Starmer says he wants to turn the UK into a “clean energy superpower” by doubling onshore wind, trebling solar and quadrupling offshore wind in just six years, creating a zero-carbon grid by 2030.
One of Labour’s headline policies is to set up Great British Energy, a state-owned energy company that it says will “partner with energy companies, local authorities, and co-operatives to install thousands of clean power projects through a combination of onshore wind, solar, and hydropower projects”.
The party has pledged to inject £8.3 billion (US$10.5 billion) over five years into this. Labour has also promised to invest £6.5 billion over five years to upgrade five million homes and them more energy-efficient. Other pledges include £1.5 billion to new electrical vehicle (EV) battery gigafactories, £1 billion on carbon capture and storage, and £500 million on green hydrogen. All that will be a drop in the ocean next to the many tens of billions required over that five-year period.
Still, despite funding holes, Labour’s green plan has been welcomed by climate groups disenchanted by incumbent Conservative Prime Minister Rishi Sunak’s recent backtracking on key climate policies. The latter’s reversals include delaying the planned phase-out of petrol cars and gas boilers, reopening the North Sea to oil and gas extraction, and promising to build more gas power plants.
These anti-green measures, combined with an increasingly climate-sceptic rhetoric among Conservatives (Sunak has disparaged green concerns as “environmental dogma”), have spelt the end of nearly two decades of cross-party consensus on climate in Britain.
“There is a dramatic difference on what the two main parties are aiming for,” says Ed Matthew, Campaigns Director at climate think tank E3G, expressing a scathing view of Sunak’s recent backtracks.
“I can promise you, the Conservatives would fail to meet their emissions target for 2030, whereas Labour is quite committed to it,” he says.
But Labour’s plans will cost a lot more than it has so far committed to spend. The Climate Change Committee – a statutory body tasked with monitoring the UK’s progress on decarbonisation – has estimated the cost of reaching net zero by 2050 somewhere in the region of £50 billion a year.
Where, then, will it find the money to fund these ambitions?
Improved economic growth is its first answer, but most economists say that is unreasonably optimistic. Its second is the private sector – specifically, pension funds.
Raiding the retirement piggy bank
Britain has the third biggest pool of pension money in the world – US$3.2 trillion, according to Willis Towers Watson – and Labour has made no secret of the fact it wants to funnel as much of that as possible into the economy.
“Labour will … act to increase investment from pension funds in UK markets,” the Labour manifesto states, promising to undertake a review of the pensions landscape to find out how to unlock domestic capital flows.
On clean power, Labour will start from a reasonably strong place by global standards. Britain has undergone one of the most rapid energy transitions in the world, ending its dependence on coal-fired power and halving its emission from 1990 levels. It is a world leader in wind power, with more offshore windfarms than anywhere in the world bar China.
But, as the Climate Change Committee stated in its progress report last year, emissions from harder-to-abate areas like transport, industry, buildings and agriculture, are not yet coming down meaningfully, and will require carefully designed new policies and lots of investment.
The dizzying amount of money in the UK pension system may be a tempting answer to the funding conundrum, but the investments have to stack up, says Joe Dabrowski, Deputy Director of Policy at the Pensions and Lifetime Savings Association – the country’s leading industry body for workplace pension schemes.
“If pension funds are going to invest, they are going to be investing for their fiduciary duties – which is to get a good return for savers, rather than to invest in a particular jurisdiction for particular purposes,” he says.
The largest chunk of British pension money is in defined benefit (DB) schemes, in which investors generally take a conservative approach as they must be able to pay their members a defined amount – regardless of investment performance. Early-stage, illiquid infrastructure or risky new technologies are unlikely to fit the bill.
But Dabrowski says there is still plenty of appetite for infrastructure projects, particularly from the UK’s defined contribution schemes, which are growing fast thanks to the government auto-enrolment legislation. Under these rules, British employees are automatically signed up to a pension scheme and pay in 8% of their earnings. Workers can opt out, but most don’t.
Unlike DB schemes, where the scheme or employer takes on the risk, in DC schemes the member bears the risk, which means the schemes generally have a higher risk appetite.
Dabrowski says the next government should focus on three areas if it wants to mobilise private investment: raise auto-enrolment contribution to 12%, and thus grow the pool of investable capital; develop investment models where the government takes risk at a project’s early stages; and foster an environment of policy stability.
“Regulatory stability and political stability does help,” he says.
Sunak’s decision to delay the ban on petrol cars is an example of policy “flip-flopping” that has damaged investor confidence, says Bruno Gardner, Head of Climate Change and Nature at Phoenix Group – one of Britain’s biggest pension groups.
“The 2030 date for no new petrol or diesel sales got pushed to 2035,” he says. “That has implications for how quickly we need to build out our EV charging infrastructure. If you push that date back by five years, then that sense of urgency among investors is immediately lessened.”
You snooze, you lose
As Britain dithers on climate policy, other countries have charged ahead. The EU Green Deal, for example, has introduced policies such as a new emissions trading system that will cover transport and buildings – likely making investment in EVs and heat pumps more attractive. As it stands, Britain’s two main parties haven’t announced plans to follow Europe’s lead on this.
Meanwhile, in the US, President Joe Biden’s Inflation Reduction Act (IRA) – which offers generous tax credits on a range of green technologies – has catalysed hundreds of billions of dollars of private investment.
“It’s astonishing what [the IRA] has managed to achieve,” says Gardner. “It’s worth bearing that in mind when we’re having these debates in the UK, because there is such a huge economic opportunity.”
However, the IRA is also costing the US government hundreds of billions of dollars – a scale of spending that Labour has firmly ruled out for Britain.
Still, Phoenix remains bullish about the role that pension funds could play in decarbonising the country. Of the £2.4 trillion needed to fund the energy transition between now and 2035, the group estimates that half could come from the pension sector. Currently, it is only on track to supply 10-15% of that figure.
British pension funds such as Phoenix would jump at the opportunity to invest in their home country if it made sense for them financially, Gardner says.
“The absence of a currency risk when we invest in the UK, coupled with a desire to help create a world worth retiring into, means we make the best efforts to enable investing in the country because the vast majority of our customers are in the UK,” he says.
Keep calm and carry on
Attracting investment has been a growing problem for Britain. A recent study by the Institute of Public Policy Research (IPPR) found the UK was bottom among G7 countries for business investment. Government investment, meanwhile, was “low, volatile, and short-termist”, the report said.
“Without resources flowing into new investment, it’s hard to see how UK economic performance can improve,” said George Dibb, Associate Director for Economic Policy at the IPPR, upon the report’s release.
But despite the political and economic volatility of post-Brexit Britain, some still see the country as a broadly stable and attractive place to invest.
“The UK is a very safe ground, despite everything one hears,” Oliver Breidt, Director and founder of clean energy developer AGR Group, which is 50%-owned by British pension fund Railpen – tells ESG Investor. “It has a very sophisticated financial system and investors, and extremely high regulatory security.”
A key area for reform in the UK is the planning approval process of infrastructure projects, which most observers agree is slow and bureaucratic, Breidt says. Upgrading grid infrastructure is also key to getting more renewable energy into the system.
The wind and solar sectors are now mature enough to stand on their own without government support, he says. But other sectors will need backing to attract private finance, and the current government has scrapped some support measures prematurely.
These sectors include new technologies such as hydrogen and sustainable farming. “The UK was leading on this, but now innovation [is] falling behind,” Breidt says.
Leader no more
This view – that the UK once led on the energy transition but is now falling behind – has become common.
“Britain can no longer claim to be a world leader on climate,” E3G’s Matthew says. “Sunak has set out a new narrative on net zero that is all focused on the costs rather than the benefits, which has flowed through Conservative political messaging.”
This, he argues, has damaged the UK’s reputation and ability to shape diplomacy, as well as undermined investor confidence in the country’s transition.
Overall, though, the message for the incoming government is not all doom and gloom. UK pension funds want to invest in the green transition, and if they can do so on their home turf then all the better. But stable policies, a clear roadmap and good investment opportunities will be key – all of which will require the government to put its money where its mouth is.
“To get us on track, Labour will have to pump a lot more money into decarbonisation than it has put on the table,” says Matthew.
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