The UK pensions industry could invest up to £1.2trn in decarbonisation strategies and technology, if given the freedom and impetus to do so, a report from Phoenix Group and Make My Money Matter has suggested.

The report argued that pension schemes are currently held back from allocating further capital into green investments due to a number of barriers.

The duo said the main barriers to "climate solution" investment for pension funds are a scarcity of investible and scalable opportunities, and regulatory constraints.

In the case of the former problem, the report said trustees face " high levels of bureaucracy in permission processes" when it comes to some investment strategies.

It also identified liquidity constraints and fee caps for defined contribution (DC) schemes as obstacles, as they limit the appeal of illiquid long-dated investments, which are characteristic of many net-zero investments.

In order to remove these hurdles, Phoenix Group and Make My Money Matter suggested the instalment of an economy-wide transition plan for the United Kingdom, which defines a range of sector-specific strategies, roadmaps and policy instruments to support low-carbon investment.

At the same time, the government could help scale green investment and also incentivise funds to invest in decarbonisation.

The paid suggested that it could do this by aggregating fragmented investment opportunities and providing consistent planning regime at national level, while introducing tax subsidies to reduce net-zero investment volatility or to abate costs for start-up technology providers.

In addition, it suggested that regulators could provide clarity on considering climate impact as part of schemes' fiduciary duties and accelerate the implementation of green reporting requirements.

Risk-sharing mechanisms between investors and government — at both a central and local level — could also be effective ways of closing the funding gap and attracting private investment.

The report estimated that pension funds currently allocate some £100bn into "climate solution" investments and, based on current circumstance, are on track to increase this to £300bn by 2035.

However, if the report's suggestions are implemented, it claims investment in decarbonisation could quadruple to £1.2trn in that same timeframe.

Phoenix Group head of climate change and nature, Bruno Gardner, said the report sets out the significant role the pension industry could play while continuing to prioritise the best outcomes for pension savers.

"It's exciting to see that pension funds could finance up to half of the investment needed to keep the UK's transition on track and provide savers with greater access to the investment potential of climate solutions, but it's even more important to have identified why there isn't already more funding for climate solutions and what can be done about it," he continued.

"This research will help us start much-needed conversations with government, regulators and our peers so that we can collectively help pension funds fulfil their potential in the nation's journey to net zero.

"By setting out the scale of the opportunity, we hope to show that by creating a pipeline of investable opportunities and by making it easier to invest in climate solutions we can come together and drive positive change."

Adding to this, Make My Money Matter co-founder, Richard Curtis, said pension schemes are "nowhere near" maximising their potential as investors in decarbonisation.

"By taking these steps [outlined in the report], we can mobilise more than £1trn to help tackle the climate emergency, both at home and abroad," he claimed.

"By doing so we can put our money to work for people, planet, and a prosperous retirement, and ensure we all have pensions we can be proud of.”

Mission Zero Coalition chair, Chris Skidmore MP, said the group welcomes the report, which he said shows the enormous opportunity both in the short and long term, that the pensions industry can achieve in helping drive the UK’s net zero ambition.

"To do this, collaboration between government, regulators and industry will be key, and we look forward to continuing working, through the Mission Zero Coalition, with Phoenix and the wider industry to drive investment and growth in the UK economy,” said Skidmore.

Share Story: