Pension Funds: Financial and Ethical Investments

[Mr George Howarth in the Chair]

I beg to move,

That this House has considered financial and ethical risks of investments in fossil fuel companies by pension funds.

I refer Members to my entry in the Register of Members’ Financial Interests, in which I disclose my interest in renewable energy, particularly solar.

Parliament has declared a climate emergency. I welcome that tremendously, but it prompts the question: how do we solve that emergency? The good news is that many of the technologies we need are already here, and they are developing fast. From solar to wind to storage, their price is coming down fast—far faster than many people expected—and their reliability is increasing dramatically. On top of that, massive innovation will propel those technologies further forward, and we will enter a cheap green energy age.

The barriers to dealing with the climate emergency are no longer technological; they are more about policy, leadership and cash. We need politicians to show leadership, but we also need to ensure that investment funds get behind the new technologies at a speed and with an urgency that currently we are not seeing. That is why we, as a country and as the world, need to disinvest from fossil fuels and dirty technologies, and reinvest in clean green technologies. The question is how we propel that as fast as possible.

I believe we need a system-wide approach. We have to decarbonise capitalism at a fundamental level across the whole of the City—the debt markets, the stock exchange, the banks, the Bank of England’s own balance sheet and the pension funds. The Committee on Climate Change has asked for Britain to become carbon net zero by 2050, but we produce only 1% to 1.5% of global greenhouse gas emissions. However, 15% of the world’s greenhouse gas emissions are funded in London, so not only do we have the power to get our own country’s greenhouse gas emissions down to zero, but we can help spread that around the world and be a real leader. We could be the green finance capital of the world and say, “We will no longer finance the climate crisis in our country.” If we did that, we would show dramatic leadership in the world on this emergency. We should start with pensions.

The right hon. Gentleman is making a cogent argument. Can he assure me that the parliamentary pension fund, which has long been looking at this issue, is now clear of fossil fuels? We should ensure that that is completely the case.

I believe that is not the case. We need to ensure that the parliamentary pension fund becomes zero-carbon. We as Parliament need to say, “Divest Parliament.” That would show leadership both to public schemes, particularly in local authorities, and to the wider sector. Let us remember that we have already discovered four to five times the fossil fuels the world would need to exceed a climate change budget. We already have too many fossil fuels. We should not invest in more. We should disinvest now.

The previous Government target to cut carbon emissions by 80% by 2050 is no longer relevant because we have to cut our emissions to net zero, so fracking, which is a source of carbon fuel, is no longer an option for this country. Should not the Government reflect that new reality and issue new planning guidance for local authorities or give them new powers? Such leadership would have an immediate consequence: investment in fracking as a source of fossil fuel would no longer be an option or attractive to investors.

I totally agree with my hon. Friend. In government, we placed tough regulations on that sector, which were based strongly on environmental considerations. It has not been able to grow to meet them. It has nowhere to go.

I congratulate the right hon. Gentleman on securing this important debate. I agree entirely that Parliament should take the lead in not investing in fossil fuels. Yesterday, BP’s investors decided that it should adopt a totally different strategy on carbon fuels so it fits in with the Paris agreement on climate change. Does he agree that other companies should take that way forward?

I saw what happened at the BP annual general meeting yesterday, and I welcome it, although a second motion, which was a bit stricter, did not carry. I would have liked that motion to carry.

That brings me to my argument. Not only is there a moral imperative for us to divest, given the threat climate change poses to our planet; there is also a financial risk for pension funds and their beneficiaries. We need to explore that. We need to make it clear to pension fund managers and trustees that pulling out of fossil fuels is the right thing to do in financial terms. The real issue is often called the carbon bubble. We are investing in more fossil fuels than we could possibly need if we were going to stay climate change compliant. At some stage, that bubble of investment in carbon that we do not need will burst, leaving pension funds and the wider economy in a serious mess. Those assets would be worthless; they would be stranded assets, which would cause huge disruption in our financial sector.

I agree completely with what the right hon. Gentleman is saying. I think he is coming to the heart of the matter. I, like many other people, have a private pension fund, and I instruct my broker to ensure that it is directed into ethical investments. Of course, the broker has always said, “You’re not going to get as much of a return as you might get if you invested in other things.” The time has come for that paradigm to be reversed. We have to explain to investors that, over the next 10 to 15 years, increasing governmental action against fossil fuels and dirty technology will make their returns worse. Now is the time to jump ship and to disinvest from dirty technology.

I totally agree. Indeed, analysis by the Grantham Institute shows that if someone had not held fossil fuels in their portfolio for the last 50 years, their overall returns would not have been any different. The idea that we have to invest in fossil fuels to have a return was not true in the past, and it is not going to be true in the future.

I am grateful to the right hon. Gentleman for giving way. I thought I would intervene at this stage to try to frame the debate, because I think some colleagues will not be aware of the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018, which the House passed in September last year. Those regulations require environmental, social and governance matters to be taken into consideration as part of the statement of investment principles, and require individual pension fund trustees to take into account ESG factors when considering their strategic process to invest. I suggest that is one of the reasons why BP, the parliamentary scheme and others are beginning to change their approach. Those regulations will come into force in October.

I am grateful to the Minister for his intervention. Those new ESG guidelines are helpful, but I am afraid I do not think they are quite up to the scale of the task we face. I will come to that in a second.

We have this carbon bubble; the question is how we are going to deflate it. How will we move from where we are now, with this big risk to our economy, to the low-carbon economy we need? One option is to say, “Well, it will sort itself out. We don’t need to worry now. We can delay it all and it will be all right. We can allow the fossil fuel companies to keep investing in exploring and getting even more fossil fuels, and inflate that bubble even more.” How risky would that be? That is one scenario that some people seem to think is possible. I reject it entirely.

Another approach is to say, “Let’s reduce, and ultimately stop, exploration for further fossil fuels. Let’s not inflate that bubble any more. Let’s gradually deflate it, so we can have an orderly transition for our economy, our energy sector and all the communities, towns, cities and people who depend on it.” That is the solution, and that is why I have concluded that we must disinvest and reinvest in a thoughtful, careful way. If we do that, we can tackle the climate emergency and avoid a financial and economic catastrophe.

That brings me to the Minister’s point. There are three possible approaches to disinvestment and investment. One is what I would call the gentle, market-led approach, which says, “If you have a bit more transparency and disclosure and a few ESG guidelines, it will all take care of itself.” I am in favour of all that stuff, but it is nowhere near up to the task. It is not urgent enough. We have people talking about voluntary disclosure. No, we need mandatory disclosure now, regulated by this House. I applaud the ESG guidelines, but they are a little woolly and poorly defined. They are little nudges when we need more than a nudge, because this is an emergency.

The right hon. Gentleman seems to be advocating a reduction of investment in energy companies. Does he recognise—I am sure he does from his time as Energy Minister—that many such companies, and particularly the larger international oil companies, are investing in new technologies, cleaner technologies and research and development in renewable energy?

I am not trying to get rid of energy companies; I am trying to get them to switch. We have a couple of examples of big energy companies switching out of fossil fuels and into green technology. Some have done that around the world successfully. Unfortunately, most of the majors to which the hon. Gentleman refers have not done so on any serious level at all. I did some calculations that showed on average their capital expenditure on green technology in the last decade or so is just 1.3% of their total spend. That is just not serious. I hear what he says, but we must get those energy companies to take this far more seriously. Some are beginning to shift, but we need to show that they must step up to the plate.

We have a climate emergency, and it is great that we are seeing people—young people in particular—coming out and protesting. I celebrate what they have done. There is a thirst for Governments to take action. The question is: are our actions up to it? The only response to what people are arguing for and what the science says is a quite dramatic systemic change. In the disinvest and reinvest approach and the policies I have outlined, I want to argue for something very radical but practical.

Those who go to the City and talk to pension funds such as Legal & General, Allianz and Axa will find that a number of them are doing what I am talking about. Those who talk to the Governor of the Bank of England, Mark Carney, as I did four weeks ago, will find that he is absolutely on to this case. There is a coalition of willing people in the City who want to go this way; it is just that this Government and Parliament are behind the City and the regulators. We must get in front of them, because they want us to show true leadership. Let us today give that leadership.

Order. Before I call the next speaker, in view of the importance that people rightly attach to this issue, a large number of people want to speak. Accordingly, I will have to impose a time limit on speeches of five minutes. I may have to reduce that later.