The UK pensions industry has the potential to invest a substantial £1.2 trillion ($1.5 trillion) by 2035, contributing half of the required capital to accelerate the nation's progress towards its net-zero goals. This projection emerges from a report released on Tuesday, jointly conducted by British life insurer Phoenix Group and the campaign group Make My Money Matter.
Currently, the UK pensions industry allocates a mere 4% of its assets to “climate solutions” and is on track to invest approximately £300 billion by 2035. The report highlights the scarcity of scalable and attractive return opportunities in this domain. Regulatory restrictions are also identified as a barrier that hinders the financing of long-term illiquid investments, thereby hampering the industry's potential to invest in climate-friendly initiatives.
Bruno Gardner, Head of Climate Change and Nature at Phoenix, explained the challenges faced by the industry, stating, “One of the fundamental reasons is even when opportunities come down the pipeline, they are not investible … in a way that delivers strong returns.”
To address these challenges, the report outlines seven actionable steps for policymakers and regulators. These actions, some of which could be implemented within 12 months, aim to unlock the immense investment potential of the UK pensions industry.
Key recommendations include the government publishing an economy-wide national transition plan, offering long-term policy certainty and incentives to investors, and streamlining the planning and permitting regime to prioritize climate-beneficial infrastructure.
Moreover, regulators are encouraged to provide pension funds with clear guidance on incorporating climate impacts into their fiduciary duties, thus empowering them to make informed investment decisions.
The UK pensions industry boasts a significant £3.7 trillion in assets, although a substantial portion is invested in low-risk government bonds. The government has already introduced plans to encourage funds to allocate more capital to infrastructure and startups to foster economic growth.
Tony Burdon, CEO of Make My Money Matter, noted a strong demand among individual pension savers to invest in ways that reduce carbon emissions, particularly given the potential implications of climate change on future pension returns. However, smaller UK schemes and their trustees often lack the expertise to evaluate climate-related risks and make informed investments. The absence of regulatory guidance leads to a sense of extreme caution among these funds.
Globally, pension funds are recognizing the opportunities that a transition to a lower-carbon economy presents. Notably, California's top public pension system recently announced plans to more than double its climate-focused investments to $100 billion by 2030.