MPs have called on Local Government Pension Scheme funds to mitigate the economic and social risks that a shift to a net-zero economy may have on the communities most affected by the green transition, averting a repeat of the mistakes made during the downturn of industry in the 1980s.
The All-Party Parliamentary Group on Local Authority Pension Funds, supported by the Local Authority Pension Fund Forum, said that public pension schemes must be engaged in a “just transition” which ensures that the benefits of climate action are shared across society, and those involved in carbon-intensive industries such as car manufacturing and steel production have additional support and opportunities.
The report, published on Wednesday, includes the findings of an inquiry into a ‘responsible investment for a just transition’, established in January 2021, and has been released only a day after the government outlined how it aims to achieve net zero.
Not just a transition
As responsible long-term investors we have to ensure our work to achieve net zero actively supports a just transition. However, we cannot do it alone
Doug McMurdo, Local Authority Pension Fund Forum
The APPG said that a just transition is a “policy approach to climate action which seeks to ensure that the benefits of a shift to net zero are shared, while supporting those most impacted by the change” and that pension schemes, through their investment decisions, have a role to play in ensuring that economic and social risks to communities and livelihoods are lessened.
The report stated that contributions made by the industry and think tanks suggested that the “failure to understand both the social and economic dimensions to net zero risked a political backlash”.
“The inquiry heard several times that in the absence of a just transition there could be resistance to climate action. As Lord Deben, the chair of the Climate Change Committee, told the inquiry: ‘We are not going to do the transition if it isn’t just, because society won’t accept it’,” it stated.
The inquiry concluded that not fully considering a just transition poses a material risk to investors.
The report added that the costs and benefits of climate action will inevitably be uneven for countries, workers, communities, consumers, and supply chains. It recommends that funds ensure that collaborative engagements on climate change include a just transition as a central theme for discussion.
Respondents to the inquiry said that part of a pension fund’s fiduciary duty meant considering the financial implications of climate change and with it the need for a just transition.
Issue for governments and investors
The report makes a series of recommendations for the government to provide support to pension schemes.
At the highest level, it stated that the government should centralise the notion of a just transition, comprising of a strategy to reach net zero alongside tools to support investors in accessing investments that align with the just transition principles.
The report highlighted the need for a shared responsibility among savers, investors and government, and the need for schemes to deliver a just transition while working within the legal and regulatory frameworks, bolstered by the “right incentives set by governments”.
Yet there was frequent mention on the need for partnership working within respondents’ comments to the inquiry.
LGPS Central told the inquiry in its submission that there was a “perception among some investors that the just transition was an issue for governments to address rather than investors”.
“However, Covid-19 provided a further illustration of the important role that investors need to play in ensuring that management of corporations take a long-term view of their businesses,” it said.
Respondents to the inquiry indicated that local authority pension funds are “particularly sensitive” to the local and regional dimension of net zero, and so are ideal vessels to implement a just transition, “not least because they are defined by their administrative areas and have first-hand knowledge of the impact that both climate-related events, such as flooding linked to climate change, and unjust transitions can have on workers and local communities”.
The report added that the government should use its green sovereign bond programme to support the just transition by reporting on the social co-benefits of investments.
It also recommended that pension funds, especially those with a localised focus, should prioritise the protection of their communities by introducing plans to manage potential divestments, by spreading the withdrawal over a number of years rather than a sudden switch in funds.
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Additionally, accessible data on the risks facing regions, industries most affected by the transition to net zero would be a valuable tool, the report stated.
Councillor Doug McMurdo, chair of the Local Authority Pension Fund Forum, said: “As responsible long-term investors we have to ensure our work to achieve net zero actively supports a just transition. However, we cannot do it alone. The scale of challenge and potential opportunities requires sustained commitment across society and from government.”
Clive Betts, chair of the Local Authority Pension Funds APPG, said: “Major industrial changes are rapidly coming down the track. To avoid repeating the mistakes of the 1980s, which left workers and communities behind, government urgently needs to be planning for an orderly and just transition to net zero.”
