Asset owner’s Head of Climate Change and Nature calls for range of interventions to “unlock finance”.
One of the most effective ways to overcome investment barriers to climate solutions is for the UK government to develop a “UK-wide transition plan”, according to Bruno Gardner, Head of Climate Change and Nature at pensions, savings and insurance provider Phoenix Group.
“There are supply-side barriers, such as constraints on investing in illiquids, and there are demand-side barriers, because we’re not seeing a pipeline of investable opportunities coming down the track at the rate that we need it,” he said, speaking at the firm’s third annual investment forum on 9 November.
“Investors really need to see a basket of interventions and solutions being implemented to properly unlock finance [into climate solutions]. But a UK-wide transition plan is perhaps the most crucial because it sets the scene and gives [investors and companies] long-term certainty to deliver net zero,” Gardner added.
Such a high-level framework could develop and expand over time, he suggested, to stimulate investment opportunities across a range of sectors.
“Off the back of that, more specific policy interventions can be designed, which will ultimately allow for a greater volume of investable projects through which to deliver the financial returns we need to see for our customers.”
In recent months, the UK government – previously considered a frontrunner on climate policy – has made a series of U-turns, generating an environment of increased uncertainty for investors.
This has been “unwelcome”, Gardner admitted, noting that the approach of the government for much of the past decade has been one of building “real political consensus” to take bold climate action in line with the science. Recent divergence was unfortunate, he said.
Gardner praised the continued momentum from industries like vehicle manufacture, where many firms have pledged to continue transitioning in line with the 2030 phase-out out of internal combustion engine (ICE) vehicles, despite this deadline being shifted back to 2035.
“Positive signal to government”
The UK government has also been slow to introduce reforms to increase flexibility for investors to make climate-positive investments.
In July, Chancellor Jeremy Hunt announced the Mansion House Reforms to boost pensions and increase investment in British businesses. It included a commitment by defined contribution (DC) pension schemes to invest 5% of their assets in unlisted equities, which experts have said could boost allocations to green and impact investments.
There was no further mention of these reforms in the King’s Speech on 7 November, however, meaning there will be no primary legislation before the next election. It remains to be seen whether non-legislative measures will be revealed in the Autumn Statement later this month.
Gardner underlined the importance of the investment industry remaining “collectively committed to net zero, in spite of any [government] announcements”.
“This could serve as a positive signal to government that they do need to stay the course and there is huge value for everybody – whether that’s pension holders or organisations – in transitioning to net zero. We need to follow through on it,” Gardner said.
The UK is also still waiting for its Green Taxonomy, which will outline for investors and companies what economic activities can be considered sustainable.
The call for a national transition plan was one of seven strategies to bolster UK pension capital flows into climate solutions outlined by Phoenix in a recent report, published in collaboration with campaign group Make My Money Matter.
Other recommendations include the government introducing tax subsidies to reduce net zero investment volatility, providing further clarity on the extent to which pension funds can consider climate impact as part of their fiduciary duty, and accelerating the implementation of relevant reporting standards, such as the Sustainability Disclosure Requirements. Progress on the latter is slated for Q4 2023.
The report estimated that UK pension funds currently allocate around £100 billion into climate solution investments and are on track to increase this to £300 billion by 2035.
By implementing the recommended changes, the UK pension sector could boost its investments in decarbonisation to £1.2 trillion within the same timeframe, Phoenix has claimed.
The report follows the publication of Phoenix’s first net zero transition plan in May, which included a pledge to decarbonise its £300 billion investment portfolio by increasing allocations to climate-positive investments and heightening stewardship efforts with carbon-intensive portfolio holdings.
“As we get further towards net zero, we [investors] will become more dependent on others, in particular, governments, regulators and high-emitting sectors [to deliver against climate targets],” said Gardner.
“Everybody needs to act, and we need to act rapidly.”