Government directive means trustees will be able to push harder for green investments
Julia KolleweMon 18 Jun 2018 07.26 BST
Managers of the £1.5tn invested in Britain’sworkplace pension schemes are to be given new powers to dump shares in oil, gas and coal companies in favour of long-term investment in green and “social impact” opportunities.
Government proposals published on Monday are designed to give pension fund trustees more confidence to divest from environmentally damaging fossil fuels and put their cash in green alternatives if it meets their members’ wishes. Until now many pension trustees have been hamstrung by fiduciary duties that they feel requires them to seek the best returns irrespective of the threat of climate change.
The new rules, though couched in opaque legalese, are a coded go-ahead for pension funds to sell shares in fossil fuel companies if they believe that they could turn into “stranded assets”. The term refers to companies’ coal, oil and gas deposits that may not ever be monetised as the world transitions to a low-carbon economy.
In the paper published on Monday, Clarifying and Strengthening Trustees’ Investment Duties, the Department for Work and Pensions (DWP) said: “Our proposed regulations are intended to reassure trustees that they can (and indeed should) take account of financially material risks, whether these stem from investee firms’ traditional financial reporting, or from broader risks covered in non-financial reporting or elsewhere.”
Environmental campaigners reckon that investments amounting to trillions of dollars in fossil fuels – coal mines, oil wells, power stations, conventional vehicles – will lose their value when the world moves decisively to a low-carbon economy.
They believe that fossil fuel reserves and production facilities will become stranded assets, having absorbed capital but are unable to be used to make a profit. This carbon bubble has been estimated at between $1tn (£753m) and $4tn, a large chunk of the global economy’s balance sheet.
But the DWP warned that the new rules do not give carte blanche for activist groups to bully pension funds into selling out of fossil fuels. “These proposals are not intended to give any support to activist groups for boycotts or divestment from certain assets,” the DWP paper said. “Trustees have primacy in investment decisions and, whilst they should not necessarily rule out the ability to take account of members’ views, they are never obliged to, and the prime focus is to deliver a return to members.”
Unison, the public sector union, launched a campaign in January to encourage local government pension funds – which have invested £16bn in the fossil fuel industry – to divest from carbon.
The new rules, subject to a consultation period, have been brought forward by secretary of state for work and pensions, Esther McVey.
“As we see the younger generation care more about where their money is going, they are also increasingly questioning that their pensions are invested in a way that aligns with their values,” she said. “This money can now be used to build a more sustainable, fairer and equal society for future generations.”
Climate change campaigners said they were delighted at the proposals. Bethan Livesey, head of policy at ShareAction, said: “ShareAction has been pushing for changes to these regulations for years.
“For too long, many pension schemes have disclosed little more than vague, high-level statements on their approach to ESG [Environmental, Social and Governance] factors, and it is unclear what, if anything, is being done behind the scenes.
“Pension schemes seem to fall into three camps: those who understand the financial value of taking ESG factors seriously and do so, those who say they understand but do very little and those who have no clue. These changes to the regulations should at the very least enlighten the third group.”
Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk A growing number of UK and European insurance companies have started selling holdings in coal companies and refusing to insure their operations. More than £15bn has been divested by insurers including Allianz, Aviva, Axa, Legal & General, Swiss Re and Zurich in the past two years, according to Unfriend Coal Network, a global coalition of NGOs and campaigners including 350.org and Greenpeace.
Last week Legal & General said it would exclude China Construction Bank, Russia’s Rosneft, the Japanese carmaker Subaru and five other companies that have failed to act on climate change from its Future World Fund.