Greater incentives are needed to encourage institutional investors, including pension funds, to invest in such a way to help prevent climate change, investment experts have argued.
The government has today (12 June) laid legislation to require the UK to achieve net-zero carbon emissions by 2050. The statutory instrument will amend the Climate Change Act 2008 to make the UK the first G7 country to set a legally-binding target on emissions.
It comes as pension schemes are increasingly being urged to use their funds to invest for a low-carbon future. Earlier this month, pensions and financial inclusion minister Guy Opperman said the risks of climate change are "too important to ignore" and that schemes should "do the right thing" by investing with the climate in mind.
From October, schemes will have to report on how their default funds take into consideration ESG factors, including climate change, and explain if certain financially-material risks are ignored.
Octopus Energy Investments co-head Matt Setchell welcomed the target but said how to achieve it was the "elephant in the room" as the "UK currently lacks the required investment".
"Given public interest in tackling climate change, pension funds in particular may have a responsibility to invest the public's pension funds into climate saving causes," he added. "Pension funds are acutely aware of rising public pressure and this, combined with a new government agenda, will help them take the necessary steps to review how their investment portfolios could prevent change.
"It is essential that, along with setting new targets, the UK government maintains a supportive regulatory environment to encourage institutional investment into preventing climate change. Setting targets alone will not incentivise investment."
Hermes Investment Management head of policy and advocacy Ingrid Holmes said the target was "great news" and welcomed the "long-term certainty this provides for investors". But she warned that, without additional policies, little progress would be made.
"The next step will be for the government to introduce the policies needed to accelerate investment into low carbon and resilient infrastructure required to achieve these goals," she said.
"Doing so will create new opportunities for pension funds to deploy capital to assets that enable them to meet their financial obligations to end investors in the holistic fashion the new Department for Work and Pensions rules envisage."
Writing for Professional Pensions after Opperman's comments, LCP investment partner Dan Mikulskis also argued the problem of investing with climate change in mind was a lack of supply.
He said the minister needed to "investigate ways to incentivise the development and bringing to market of a steady supply" of such assets.
The government earlier this year set out plans to make it easier for defined contribution (DC) funds to invest in illiquid assets, such as the infrastructure needed in a low-carbon world, but has not yet responded to feedback.
Meanwhile, the recent suspension of Neil Woodford's equity fund due to liquidity concerns has raised questions over the suitability of illiquid assets in DC pots.
Last week, the Carbon Disclosure Project (CDP) found the world's 200 largest companies were exposed to close to $1trn (£790bn) of potential climate risks.
Executive chairman Paul Dickinson said this showed the need for pension funds to reinvest funds in low-carbon assets.
"Pension funds are investing in people's futures, and the future of the economy is net zero," he said. "From CDP's work with companies and investors over the last 18 years we know climate change has quickly risen up the agenda to become a boardroom issue."
Around a quarter of the exposure is in "stranded assets", he said.
"These include fossil fuel assets that may no longer offer economic returns as the market shifts, or exposure to the physical impacts of climate change."
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