UK Pension Money Should Fund Decarbonisation

Phoenix says Britain should mobilise its US$3.2 trillion pension system to fund the energy transition at the local government level.

Britain’s vast pool of retirement savings could be doing five times more to fund the country’s energy transition if local governments were empowered to direct more regional investment, one of the country’s largest pension providers has said.

Phoenix Group, which manages around £280 billion (US$352 billion) in assets, argues in a forthcoming paper that devolving some responsibility for decarbonisation efforts to the UK’s more than 300 local authorities could help bypass political inertia in Westminster and mobilise billions of pounds of private investment. That could boost Britain’s faltering energy transition in areas such as building and transport, the group says.

This idea has already been adopted elsewhere, with EU nations trialling a more local approach to tackling emissions, as outlined in a new report by think tank E3G.

But the UK has an advantage over its European neighbours: it has the third largest pool of pension money in the world at US$3.2 trillion (£2.63 trillion) – putting it behind only the US and Japan (with US$35.6 trillion and US$3.385 trillion respectively), according to Willis Towers Watson.

So far only a small fraction of this is funding Britain’s shift to low-carbon technologies, due to a mixture of conservative investment policies among pension schemes, regulatory hurdles and policy uncertainty, said Bruno Gardner, Phoenix’s Head of Climate.

The opportunity is huge. Phoenix deems that between now and 2035, more than £2 trillion of investment is needed for the UK’s energy transition – 80% of which could be funded at the local level.

“If barriers are overcome, the UK pension sector could meet up to half of that investment,” Gardner told ESG Investor. “But if you look at what we are doing today, we are on track to investing something like 10-15%.”

With a UK general election due later this year and the opposition Labour Party ahead in the polls, he urged the next parliament to make tackling this a priority.

Falling behind

Phoenix’s call comes as the UK government faces growing criticism over its climate policy. Once considered a climate leader, the country has lost pace in recent years, failing to implement strong policies on carbon emissions outside the power and industry sectors.

Last year, the Climate Change Committee (CCC) – a statutory body set up under the Climate Change Act to monitor progress to net zero – found the government was not on track to meet its emissions reduction targets in the next carbon budget, urging it to expand its ambition on building emissions.

“The government can no longer dodge the question on the future of heating our homes,” Lord Deben, former Chairman of the CCC, said at the time. “[It] must accelerate the deployment of electric heating and press on with the infrastructure decisions that we have called no and low regrets.”

But the government under Prime Minister Rishi Sunak has pulled back on climate policy, allowing new coal and gas projects and delaying the phase out of petrol cars and gas boilers, prompting censure from investor groups. The Labour Party has also dropped a pledge to invest £28 billion a year on green technology.

The power of decentralisation

While the national government controls key policies, such as the Emissions Trading Scheme and sustainability reporting requirements, local authorities could be doing more to decarbonise. A report last year found that up to 82% of UK emissions fell under their purview – including from buildings, transport and waste.

Local governments, for their part, say they lack resources. A 2020 survey of 90 representatives conducted by the Local Government Association found the vast majority also lacked skills and workforce capacity, which further stalled effective climate policies at their level.

The decentralisation of powers has been an ongoing trend in the UK in recent decades, with devolution in Scotland, Northern Ireland and Wales, as well as the creation of mayoralties in cities such as London, Birmingham and Manchester. Any future devolution agreements should have net zero responsibilities embedded in them, Gardner said.

European policymakers have already witnessed the potential of empowering local authorities. The E3G study highlighted successful programmes to decarbonise buildings led by such authorities in Krakow, Poland and in Leuven, Belgium – both part of the EU’s Net Zero Cities initiative.

“Tapping into the natural convergence of multiple stakeholders at the local level can serve as a catalyst for climate action,” the report said.

Proposed reforms

Phoenix is due to publish a report later this month, in which it will outline a suite of proposed reforms to address these hurdles.

It will call for the creation of an investor advisory body to work with the Department of Energy Security and Net Zero (DESNZ). The two entities would work together to collectively build the skills and capacity needed in local authorities to create an “investible deal pipeline of climate solutions”, and help them understand requirements from institutional investors.

Phoenix will also call for a more consistent approach to local government decarbonisation efforts through Local Areas Energy-Planning (LAEP) schemes, modelled on successful initiatives currently running in the West Midlands and Bristol.

Finally, the pension provider will call for the adoption of de-risking strategies such as loan guarantees and blended finance, which it says would increase private sector investment in local schemes. An estimated £5 billion of public money could underwrite as much as £100 billion of private investment, according to Phoenix’s estimates.

“Blended finance and other forms of public spending are essential for the energy transition,” said Emre Tiftik, Director of Sustainability Research at the Institute of International Finance (IFF), adding that some nations’ reluctance to following the “big spend” approach undertaken by the US under the Inflation Reduction Act meant they would inevitably fall behind.

“Europe made a choice,” he said at a briefing in London on Monday. “Europe doesn’t want to spend money [on the energy transition] – it wants to regulate. In the short term, the negative impact is…you will lose competitiveness. You will lose against China, and you will lose against the US.”

 

 

 

 

 

 

 

 

 

 

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