Mhairi Gooch from Hymans Robertson highlights the key role that Local Government Pension Scheme funds play in the journey to net-zero through stewardship, engagement and investment in renewables.
The UK government’s review of its net-zero plans was published in January 2023 and titled Mission Zero: Independent Review of Net Zero. It starts with the proud statement that “forty-two months ago, the UK became the first G7 country to sign our commitment to net zero greenhouse gas emissions by 2050 into law”.
But it shouldn’t have taken this long to put down on paper how this transition needs to happen and establish the detail and clarity needed.
The scale of the transition to a clean, low-carbon future is as this review states, enormous. With that, identifying and growing opportunities domestically is what all countries need to do, and this review serves as a good start on this for the UK.
The next step ideally is collaboration at a global level to link individual countries’ strengths and we hope to see this develop.
Room151’s LGPS Private Markets Forum
21st June, 2023, London FREE for LGPS Practitioners
SPEAKERS – AGENDA – REGISTER
LGPS in ‘front seat’ of race to net zero
The review places emphasis on local authorities acting as a key partner in delivering net zero and it is encouraging to see statements such as, “‘full backing’ will be provided to the ‘trailblazers’ that want to go further and faster on net zero, with the aim of reaching net zero by 2030”.
A long-term horizon and the ability to be good stewards of assets put the Local Government Pension Scheme (LGPS) in the front seat of the race to net zero.
Echoing some of the sentiment in this report on timing and action needed, capital allocation can accelerate the net-zero journey and go hand in hand with the crucial role that stewardship needs to play.
The focus here should be on investing in this transition by engaging across all sectors with companies that need to decarbonise for a greener future.
At the same time, capital should be directed to those providing solutions and emissions ‘removers’ like nature-based capital. Balancing the emissions equation in the real-world context whilst maintaining the funding security for members is achievable but, action is needed today.
‘Climate change is a social issue too’
Climate change is not just an environmental issue, it’s very much a social issue too. The Paris Agreement itself has tried to address this with the use of the term ‘just transition’ as well as supporting climate adaptation.
The primary role of LGPS is to meet member benefits, but this can be paired with addressing local agendas.
The UK government’s levelling up agenda, for example, is very much aligned with this in a net-zero context. Supporting local jobs as well as driving climate solutions can go hand-in-hand, this could be through investments in regions of the UK that are seeing their industry shift or disappear entirely.
A great example here is Danish energy company Ørsted, which is among the world’s leading renewable energy companies having transitioned from being one of the most coal-intensive corporations in Europe.
Over the last decade, the East Coast Hub, an offshore wind operations centre based in Grimsby, has grown to become one of Ørsted’s major areas of development in the UK. Across several sites, the existing and future wind farm developments will contribute 17% of the UK government’s 2030 ambition of offshore wind.
15th Annual LATIF & FDs’ Summit – 19 September 2023
250+ Delegates from Local Government & Investment
Unlocking benefits in local areas
An independent study by the Opergy Group of Ørsted’s economic impact on the region over the past decade concluded that “through employment and training opportunities, wind energy in the Humber has transformed the shape of work in the region, engaging local people in a fast-growing and dynamic industry”.
The review also stated that: “It has provided new skills and sustainable jobs in a coastal economy, boosting production and providing a source of regional prosperity for decades to come.
“Through direct investment in local education and training opportunities in the company, Ørsted is providing a route for local young people to enter one of the world’s most dynamic and growing industries.”
From wind to hydrogen projects to low-carbon social housing, there is a range of potential projects that offer the appropriate level of risk and return to support the transition to a net-zero economy. LGPS funds are well-positioned to participate in these.
‘Long game’ of active engagement
For the UK to achieve net zero, it must also work at a global level across all economies. For any asset owner with a net-zero ambition, we need to keep an eye on the real economy implications.
One of the important points here is about staying invested in key industries that we need for the future, not simply removing the highest emitters.
To meet the Paris Agreement, we need those companies to transition today, and that is a long game. Active engagement is then the lever we have to effect change, and that engagement needs to be with consequences. For example, the risk presented by an investment that is not successfully transitioning to a low-carbon world would present significant risk and divestment should be considered.
The fossil fuel industry is always challenging. The managed phase-out of fossil fuel investments is likely to be more effective as long as it happens in a reasonable timescale.
Perhaps only those companies with credible decommissioning plans or significant capital expenditure going to renewable research and development are worthy in portfolios.
Finally, with a more global view, the interesting asset classes that can change the dial on financed emissions such as timberland can play an important role in LGPS strategy from a risk, return and emissions perspective, particularly for those trailblazers.
Mhairi Gooch is a senior responsible investment consultant and net zero lead at Hymans Robertson.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
