The pensions industry needs to support the transition to a net-zero economy through investments in clean electricity, industrial practices and transport, Energy Transitions Commission chair, Lord Adair Turner has said.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Investment Conference 2021, Turner noted that the new clean electricity system is likely to create “lots of opportunities” for relatively low-risk investments, which will have relatively low but “still attractive” returns.

He stated that, provided pension investors create good power-marketed structures with contract certainties over many years, a wind farm development or network development should “essentially be an infrastructure project giving an annuity”.

“In an environment where you are pension savers, that should be an extremely attractive form of investment, in particular in today’s environment,” he continued.

“Back in 1990, if you were running a pension fund and wanted to match long-term fixed liabilities to pensioners with an absolutely safe return, you could have bought a UK index-linked bond and got a real return to maturity of about 3.5 per cent plus indexation. That return now is -1 per cent.

“What we have in the infrastructure of the electricity system is huge opportunities to receive returns of 2, 3 or 4 per cent real. Not ‘shoot the lights out’ returns, but moderate and low-risk returns which ought to be attractive in that environment.”

Turner added that pension investors need to support industrial and transport decarbonisation.

He noted that although this was a more risky investment than clean energy due to it being more complicated, as investors need to question when the company they are investing in should be decarbonising, what technologies it is using and how they are going to stay competitive, it is “incredibility important” it is supported by pension investors.

“Another challenge for the investment industry is exiting fossil fuels,” Turner continued. “Somehow we have got to run an economy which still does produce fossil fuels, but gradually produces less of them.

“That creates complicated issues for investors about whether they should get out of fossil fuels entirely or whether that really helps. If you simply sell it to a private equity holder who cares less about the climate than you do, is that a good thing or not?

“Nobody should be funding new coal mines, but if you turn to the oil and gas sector there is going to have to be a gradual transition and I think one should be supporting the companies that have clear plans to get to net zero even if they are not cutting out production tomorrow, because they can’t.

“There are a set of interesting opportunities. That percentage of your portfolios that you allocate to alternative investment, higher risk higher return investment, there are lots of new technologies that we will need to solve this problem, which if you back them will make a high return but inevitably with higher risk.”

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