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The way pensions are invested can have a positive impact on climate change while also managing the risks and maximising the opportunities of climate change for our customers.
The adverse effects of climate change are already being felt around the globe. As the UK’s largest long-term savings and retirement business, we recognise our responsibility to tackle it.
Did you know that the UK pensions industry could invest £1.2 trillion into tackling climate change by 2035? At the moment, there are barriers in our way, but we’re taking action to overcome them and unlock this potential investment.
We want to help shape a better future while delivering good outcomes for our customers and reducing their exposure to climate-related risk.
When people think of addressing climate change, the first things they think of are often the things that we use and do in our day-to-day lives. This could include recycling, or taking public transport rather than a car, or buying goods from more sustainable companies.
However, focussing on the less tangible aspects of daily living can still have an impact. And pensions are one such area.
When you pay into your pension, that money is invested to ensure that, by the time you retire, you have an adequate pot to live on. Some people choose to make their own decisions about how their pension is invested, but many rely on their pension company to do this for them.
The ways in which this money is invested, and then how those investments are used, can have a significant impact on helping to address climate change.
Net zero isn’t just about us meeting our Net Zero Transition Plan aims by 2050, we want to support the whole of the UK’s net zero transition plan too. When the new Labour government came into power on 5th July 2024, they were clear in their ambitions to make the UK a “clean energy superpower” and the “green finance capital of the world”.
Prime Minister Sir Keir Starmer has said that the clean energy transition represents a huge opportunity to generate growth, tackle the cost-of-living crisis and make Britain energy-independent once again, and he has made clean energy by 2023 a government priority.
But the UK meeting its net zero target by 2050 remains a huge challenge. Given the financial constraints facing the government, the private sector will be crucial to providing the majority of investment required to keep net zero on track. But this will require a change in policy that helps to support investment outcomes.
Scaling up investments in climate solutions
£1.2 trillion is how much the UK pension industry could invest in climate solutions by 2035 if we overcome the barriers to investment
Investment in climate solutions, which means things like new technologies that can help to fight climate change is currently limited by a scarcity of scalable opportunities and regulatory constraints. We know there is a genuine appetite across the UK pensions industry to scale up investment in climate solutions – and many companies have set public aspirations to do so. But many are currently struggling to match their ambition with action due to a range of policy and regulatory barriers which affect both the demand for finance and the supply of finance. These barriers limit our ability to invest in ways that deliver customer value and, crucially, align with fiduciary duty (which means our legal responsibility to act in the best interest of our customers).
But scaling up investment in climate solutions is one of the key ways that we can help to achieve net zero. And with 12 million customers and close to £0.3 trillion assets under administration, our scale means we can make a real difference.
Our Unlocking Investment in Climate Solutions report found that, with the right reforms and on the right terms for pension savers, the UK pension sector could quadruple its investment in UK climate solutions between now and 2035 to up to £1.2 trillion. This would account for half of the overall gross capital investment needed by 2035 for the UK to remain on track with its net zero transition.
By increasing the amount that people and employers pay into pensions, there would be more money to invest in climate solutions, which in turn would help to lower climate-related risk for pension customers. The government must address both the supply and demand of finance for climate solutions in order to crowd in private sector funding to support delivery of the country’s net zero transition.
You can read more about our proposed solutions to these barriers in our Unlocking Investment in Climate Solutions report and our follow-up paper, Charting the UK’s Net Zero Future.
The way we learn, earn and save hasn’t been kept up-to-date with the reality of our longer lives. Our careers and ideas of retirement look different to how they did 50 years ago. This can leave people with less savings than they need to achieve the retirement they want, when they want it. It’s this potential shortfall that we call the pension savings gap.
As providers of pension and savings solutions, our primary focus is to deliver good financial outcomes for our members and customers. We believe that by successfully navigating the transition to a net zero future, we can improve risk-adjusted returns for our customers. Unlocking investment is closely tied to the government addressing the pension savings gap that exists in the UK.
It might sound like a complicated concept, but really it means looking at where money is invested and making choices to invest in companies whose plans are aligned with a net zero future. To us, this means they represent a less risky investment than companies whose plans aren’t so well aligned with a net zero future.
When our customers pay into a pension, we hold money for them and invest in assets such as stocks, shares and bonds.
Each investment we make forms part of our investment portfolio, which means we have part ownership of a company or asset and along with that, responsibility for a proportion of its carbon footprint.
When we add together the carbon footprint of all the investments across our portfolio, it equates to 99% of our total emissions. Taking action to reduce emissions across our investments is therefore where we can have the greatest impact.
Decarbonising our portfolio is not quick, but it will have a significant impact on our total emissions. We aim to do this by influencing the companies we’re already invested in to take action to reduce their emission and by investing in low-emitting companies and sectors, and those committed to helping to deliver a net zero future.
And we’ll tilt our investments away from companies who we believe don’t have a credible net zero plan. All our future actions will be carefully reviewed to ensure decisions are always aligned to good customer outcomes.
However, we are still on our journey towards net zero and decarbonising our portfolio and still have a long journey ahead.
At Phoenix Group, we’re committed to advocating for the economy-wide change required to boost climate investment across the UK. Through our work with government, regulators and industry, we’re working to inform the conversation while always prioritising the good outcomes for our customers.
We’ve also launched a bespoke "Climate Aware" index series in collaboration with FTSE Russell. These benchmarks aim to reduce climate-related risks for our customers by reducing exposure to companies that lack good climate transition plans. This is a key part of our decarbonisation strategy for equity investments, in line with the aims set out in our Net Zero Transition Plan. The index series will enable us to introduce benchmarks that aim to increase the resilience of customers’ portfolios to climate change related transition risks.
We launched Future Growth Capital to support the objectives of the UK’s Mansion House Compact, which aims to get the UK’s largest pension fund managers to invest in fast-growing businesses. Future Growth Capital will help us to unlock investment opportunities in private markets to help savers benefit from the opportunities that unlisted assets can offer.
Phoenix Group is the brand name of Phoenix Group Holdings plc, its subsidiary companies and brands.
