Ex-energy secretary: Force divestment from companies flouting Paris accord

Pension funds are at the centre of tackling the climate crisis, he said. Investors sit atop hundreds of billions of pounds, but ignore the power they wield to drive a green finance revolution.

Sir Ed outlined his plans for making the UK a world leader in green finance in a packed Westminster Hall debate. “We could be the green finance capital of the world,” he said.

“Fifteen per cent of the world’s greenhouse gas emissions are funded in London. We have the power, not just to get our own country’s greenhouse gas emissions to zero, but we can help spread that around the world and be a real leader.”

The proposals go much further than current regulations on environmental, social and governance factors, calling for pension funds to divest from companies that are not on track to meet the decarbonisation goals set out by the Paris Accords of 2015.

Trustees have a fiduciary duty to take climate risk seriously, he said. “This isn’t just a moral imperative, given the threat that climate change poses to our planet, it’s actually issues around the financial risk that is posed to pension funds and their beneficiaries.”

The world economy has a "carbon bubble", research from financial think tank Carbon Tracker has found. This means that as companies hold more fossil fuels than can possibly be burned according to the Paris agreements, governments will need to take drastic legislative action – precipitating a value crash of current carbon reserves.

If pension funds fail to sell their stake in carbon-reliant investments, these could become “stranded assets,” dramatically eroding portfolio value, Sir Ed said.

He set out a five point plan for tightening regulation on the City of London. First, mandatory disclosure for fossil fuel companies to show how they reach the Paris targets. Second, new climate accountancy rules so auditors produce Paris-compliant accounts. Third, new reporting requirements for pension funds to demonstrate alignment with Paris. Fourth, new powers for the Pensions Regulator and the Bank of England to penalise pensions funds not properly managing climate risk. And fifth, a register of UK low-carbon investment opportunities.

“We need to make it clear to pension fund managers and pension fund trustees that they are actually doing the right thing, in terms of finance, if they pull out of fossil fuels,” Sir Ed added.

A shot in the arm for divestment

The plans have been welcomed by climate change experts. Cameron Hepburn, director of Oxford University’s Smith School of Enterprise and the Environment, said: “Ed’s plan, whether fully adopted or not, represents the strong direction of travel as climate risks start to hit and as the transition to a zero-carbon economy continues.”

Mr Hepburn seconded Sir Ed’s point that future investments in fossil fuel companies will cease to make financial sense, due to the future risk of drastic regulation to reach Paris targets.

“Forcing investors to wake up to the risks of the fossil economy, and to the end of the fossil fuel era, will in due course lead to some big shifts in asset valuations,” he added.

ShareAction, a charity promoting responsible investment, also welcomed the plans. A spokesperson said: “It’s critical the UK government puts the right policy framework in place to ensure UK pension investment portfolios are aligned with the UK’s emission reduction targets.”

ShareAction added that UK pension fund assets are worth $3.1tn, 121 per cent of the UK’s GDP, and have a vital role to play in helping the UK meet its Paris commitments. “These actions are also in the financial interests of pension savers, since their retirement funds are currently exposed to the financial risks presented by climate breakdown.”

Current regs are not enough

The pensions minister, Guy Opperman, responded with warm words to Sir Ed’s argument, but was reticent on whether the government would adopt the proposals.

He said government regulations coming into force in October 2019, requiring pension funds to take into account environmental, social and governance issues when updating their statement of investment principles , were “utterly key” to making progress in responsible investing.

A year later, schemes will be required to report back on how they have implemented their SIPs in practice.

But Mr Opperman admitted that much more action was necessary, and said the government accepted that the UK faces a climate emergency. “There is a serious amount to be done to make sure we have alignment with Paris.

“For too long there has been a perception among trustees that things like the environmental practices of the firms they invest in are purely ethical concerns that they do not need to worry about. This is utterly wrong. Aside from the ethical considerations, there are real financial risks resulting from climate change,” he added.

Mr Opperman said individual pension savers should work with trustees in lobbying for more responsible investments. “I urge consumers, anybody who has a pension, to make the case to their individual trustees as to how it is that their money is being invested.”

But Sir Ed said the scale of climate risk demanded a system-wide change, with individual pension savers unable to “green the City of London” from the bottom-up without strong top-down regulation.

“I think the only response to what people are arguing for, but also what the science says, is quite a dramatic change – a systemic change,” he added. “[My] disinvest, reinvest approach, with the policies I’ve outlined, is something very, very radical, but also very practical.”