Pension funds are not doing enough to mitigate climate change, two-thirds of the audience at the Pensions UK Investment Conference on Wednesday said, and they remained of that view after a battle of words between ex-Green Party leader Caroline Lucas and former Conservative cabinet minister Michael Gove.  

Lucas and Gove argued for and against environmental strategies, respectively, in front of an audience of whom just a third thought pension schemes are doing enough to fight climate change. 

“We're asked to consider whether environmental strategies have a future. And my short answer would be that if they don't, then frankly, neither do we,” said Lucas. 

Citing the Institute and Faculty for Actuaries’ warning that the world is heading to 3 degrees of warming, and research suggesting UK pension portfolios could see falls of up to 30% by 2050, she said: “To ignore these risks, or even worse, to deliberately choose not to respond to them because of an ideological obsession with deregulation, is not just environmentally reckless, it's economically irresponsible as well.” 

However, she argued that investors need to move to action and invest in the things the UK knows are needed. 

“The UK's approach to date has been governance heavy and disclosure centric. It has required trustees to measure emissions, to conduct scenarios, to publish reports. Those are valuable steps, but they don't automatically redirect capital flows,” she said. “Transparency, in other words, doesn't guarantee transition.”  

Climate change is a threat, agreed Gove, saying we can and should act to mitigate it.   

“But I would also say the responsibility of the pensions sector and the pensions industry is to its members,” he added, citing fiduciary duty. “It is government's direct responsibility to deal with climate change through taxation or subsidies.”  

Hinting at the dispute between industry and government over mandation powers, Gove said: “Whenever government seeks to direct, mandate, nudge or otherwise control how you invest, they are taking you away from your principal duty, which is to look after your members’ investments.”    

As levelling up, housing and communities minister, Gove had introduced an anti-boycotts bill – although this did not pass before the election – seeking to override a 2020 ruling by the Supreme Court. The judgment said a 2016 government ban on local authorities, including their pension funds, divesting from UK defence or foreign nations was unlawful because it exceeded the secretary of state’s powers.  

Debating investment in the environment, Gove said trustees should resist attempts by the government saying members’ pension assets are safer in the government’s hands. He argued that risks, including environmental ones, should be priced appropriately in the market, with pension funds ‘following the money’, adding that such investments can be subsidised by government.  

“But the problem here is that government, rather than being honest and saying that there is a cost and we're going to ensure that you bear that cost fairly through the tax system, offloads the responsibility onto pension funds,” he said. “And by so doing, government is less than honest with the citizen and it places additional costs on independent actors.”  

Lucas retorted that the current situation is not ‘business as usual’, with humanity facing a “polycrisis” characterised by economic and environmental instability.  

“That means that we should be using all of the resources at our fingertips in order to be able to ensure that we have a safe transition, precisely for those members of pension funds who want a livable planet upon which to enjoy their pensions,” she said. “And when you've got £3tn in pension assets, not to try to put that in ways that will actually ensure a better life for everybody, a more secure life, a more prosperous life for everyone, seems to me to be particularly perverse.”  

The former MP for Brighton Pavilion said pension funds can do more, pointing to an amendment in the pension schemes bill that would stop schemes investing in thermal coal.  

“That would seek to make sure that we don't essentially undermine UK government policy, which for a long time has been to exit from coal. And yet pension funds are still able to the tune of around £10bn to invest in coal in other countries,” she said.  

Government must set an enabling framework for pension funds, she believes, so they can be confident about where they can invest: “Unless it is clear that pension funds can not only take into account individual risks around particular assets from a climate perspective but can also take into account the more systemic risks, then I think pension funds are in a very, very difficult place going forward.”  

Trustees are not clear what they can and cannot do, she said, which is what led to the fiduciary duty amendment in the pension schemes bill.  

“We've had 31 senior pension and investment figures writing to the minister requesting clarification, including 12 CEOs, including the chair of the largest defined contribution scheme Nest, all wanting that clarification. So for Michael just to glibly say, ‘We'll just leave it to the trustees’ - it is overwhelmingly obvious that it's not clear enough yet for trustees to know exactly what they can and what they cannot do and when there is the risk as well of potentially court cases down the line,” she argued.  

Gove, however, criticised the focus on pension funds, saying any rule preventing or encouraging investments should apply to everyone, not singling out pensions. 

“This is what I particularly object to. The pension funds are somehow placed in this amorphous territory – halfway between the public sector and an individual's money because of the tax benefits that they enjoy, but really because of the huge pool of capital they own,” he said. “The state and those who would seek to influence the state think, ‘Great, trillions of pounds, let me get my hands on it’.”  

He argued that because of the sheer sums involved the state and others “guilt-trip” those who are running pension funds by saying they have a responsibility to act where others would not.