A new report from the UK’s main opposition party criticising the country’s green finance strategy puts pension funds in the spotlight, warning that those following the asset-owner led Transition Pathway Initiative (TPI) risk funding brown activities, with potentially significant exposures to stranded assets — though the TPI said the report had key omissions.
The TPI recently released a report warning that no oil and gas major is aligned with a 2 degree warming pathway, calling it a “serious wake up all for any investor holding these companies”.
Finance and Climate Change: A Progressive Green Finance Strategy for the UK, was released at the weekend, with the Labour party emphasising the recommendations for the UK banking sector.
But the report, commissioned by Labour’s Shadow Chancellor, John McDonnell, also focuses on the country’s institutional investors and climate change-focused initiatives like TPI.
TPI is a free online tool tracking how companies are transitioning to a low carbon economy. It launched in 2017 with influential pension fund backing including the Environment Agency Pension fund, RPMI Railpen and the Church of England Pensions Board. Its investor supporters have around £15trn under management.
In the summer, the ruling Conservative government highlighted TPI as an example of pension funds going green in its Green Finance Strategy.
But, Labour is critical of the initiative and its assessment of companies’ preparedness for a low carbon transition.
It says the indicators used to measure companies have no clear benchmarks and that several of the oil companies that TPI ranked at the “Strategic Assessment” level continue to invest heavily in projects that will accelerate global warming.
“The pension funds guided by the TPI risk funding brown activities, contrary to their greening ambitions, with potentially significant exposures to stranded assets,” the report says.A TPI spokesperson said: “There is an unfortunate omission in Labour’s report. In addition to ranking companies based on Management Quality (as referenced in Labour’s report), TPI also assesses companies’ Carbon Performance (or how their emissions trajectory aligns with the Paris Agreement).” The person cited an analysis that “is very clear in its critique of the fossil fuel sector”.
“TPI is happy to sit down with the authors of Labour’s report”
The person went on: “TPI is happy to sit down with the authors of Labour’s report to explain the full scope of TPI’s work to help investors understand the climate risks and opportunities in their portfolios – and to work with any party to ensure the rapid decarbonisation of the UK economy as required by the Paris Agreement.”
Overall, the Labour report is critical of disclosure strategies such as TPI, warning the ambiguity engendered by a multiplicity of disclosure frameworks risks amplifying the exposure of pension funds and other institutional investors to climate risks.
It also highlights UK institutional investors’ reliance on overseas passive investments, saying index funds risk becoming ‘holders of last resort’ of fossil fuel assets as active funds divest ahead of them.
The wide-ranging report makes a number of recommendations including mandating climate change reporting; ‘greening’ the mandate of the of the Bank of England and changing the way it conducts monetary policy operations to avoid carbon bias.
It all comes ahead of a planned election next month. McDonnell said: “Labour will consider these findings and recommendations carefully and bring forward our own proposals ahead of the General Election.”
The report’s authors include Bob Kerslake, former head of the UK civil service, and academics and finance experts.