GRJ0040

Investment Association’s written evidence to the Environmental Audit Committee’s Green Jobs inquiry

About the Investment Association

1.       The Investment Association (IA) champions UK investment management, a world-leading industry which helps millions of households save for the future while supporting businesses and economic growth in the UK and abroad. Our 250 members range from smaller, specialist UK firms to European and global investment managers with a UK base. Collectively, they manage £8.5trillion for savers and institutions, such as pension schemes and insurance companies, in the UK and beyond. 43% of this is for overseas customers. The UK investment management industry is the largest in Europe and the second largest globally.

Introduction

2.       The investment management industry – through its actions as long-term stewards of clients’ assets – is working to support delivery of the Paris Agreement goals. Our clients are individual retail savers and institutional asset owners such as pension funds, insurers, charities, and governments. Their investment objectives are typically financial, for instance having enough money to live on in retirement, or meeting their pension scheme liabilities, but can also include non-financial elements, such as to invest in companies or projects that have a specific social or environmental benefit or that “do no harm”. 

3.       Investment managers have a responsibility to act in the best interests of clients and a major part of this is the generation of long-term returns. This requires the consideration of material risks, which include climate-related risks, in the investment process. Climate change is one of the greatest systemic risks that we are now facing – our efforts to address climate risk are therefore among the most important actions the industry can take to act in the best interests of our clients.

4.       As the UK takes its first steps as a jurisdiction outside the European Union, we have a major opportunity to demonstrate global leadership in acting decisively to meet the Paris Agreement. Hosting the G7 in 2021 provides the UK with an opportunity to rally many of the world’s most influential economies to commit to decisive action on climate change. Also in 2021, as we host the postponed 26th session of the Conference of the Parties (COP 26), all eyes will be on the UK to demonstrate how our actions are instrumental in keeping the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and in pursuing efforts to limit the temperature increase even further to 1.5 degrees Celsius. Using our position as a global sustainable finance leader is also central to ensuring UK competitiveness in a more sustainable world.

Question 5. What risks are there to meeting the Government’s ambitions for green job creation in both the public and private sectors? What should the Government do to create the conditions to ensure its commitments are met by both sectors?

5.       Investment managers invest in companies and real assets across the private and public sectors and in a range of different industries. Each of these industries have different drivers and constraints shaping their path to transition to net zero. To drive forward change and set an example in the UK, the UK Government must set out its plans for policy interventions specific to each sector as soon as it is able. We welcome the recent publication of the Government’s Ten Point Plan for a Green Industrial Revolution, HM Treasury’s Net Zero Review Interim Report and the Energy White Paper, all of which are important steps towards providing greater clarity.

6.       Typically referred to as “sector-specific pathways to transition”, there are different policy options available to meet net zero and the Paris Agreement goals. These different options will include tax, regulation, innovation and leveraging private sector finance. Policy decisions on some or all of these options may have an impact on the nature and conduct of the business in question and consequently alter the nature of the jobs in that business. 

7.       There are many lessons about company stewardship to learn from the pandemic. A key area for consideration when investors choose to support companies in future will be whether that company will continue to create long-term value. Investors may wish to see substantial commitments from corporate management to make their business practices more sustainable before they are willing to put additional capital at risk. Investors will consider companies’ preparedness and resilience to severe economic shocks, the impact of our natural environment on economic opportunity, and how these risks can be effectively incorporated into the investment and stewardship process.

8.       One important tool for investors to understand companies’ preparedness for these trends will be in company reporting on approaches to human capital management through enhanced annual disclosures. Company disclosures should foster improved investor understanding of the role played by the company’s workforce in generating sustainable, long-term value creation.

9.       To achieve this companies should provide shareholders with a narrative within their Strategic Report on the significant investments that the company has made over the past year, and is planning to make in the next, to improve the productivity of its workforce and the opportunities, and principal risks, relating to the company’s approach to human capital management. The IA publishes long-term reporting guidance to assist companies’ understanding of shareholders’ expectations for Strategic Reports. It is increasingly important for companies to invest in the skills of their employee base to build resilience against longer term economic trends such as digitisation and greening of the economy.

10.   In the UK, the Financial Reporting Council (FRC) encourages listed companies to make sustainability disclosures in line with Sustainability Accounting Standards Board (SASB) metrics and the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). This should include more information for investors on human and social capital. To help deliver on its ambitions for green job creation in the private sector, the Government should continue to support the development of globally harmonised reporting standards and encourage company disclosure in line with SASB in the interim.

11.   Action is needed in the next decade to minimise risks and ensure alignment with the Paris Agreement. We ask that the UK use its privileged position as a leader in sustainable finance and stewardship, and as host of the upcoming COP26, to drive forward change in the UK as well as to galvanise change in other countries.  

12.   Action today helps minimise financial stability risks arising from stranded assets and cliff edge policy decisions at a future date. Setting out clear sector-specific pathways to transition in these areas will enable the private sector to plan and enhance the possibility of green job creation in these sectors. Failure to set clear pathways may place existing jobs at risk without providing the certainty which will incentivise the creation of green jobs.

Q6. Are the Government’s ambitions for green job creation in the public and private sectors sufficient for the scale of the challenges? What changes should be made?

Q7. How can the UK ensure jobs are created in areas most impacted by the transition to a low-carbon economy?

13.   The Committee on Climate Change’s (CCC) Net Zero Report of May 2019 sets out specific policies that are required to address “key areas of emissions across the [UK] economy”. According to the CCC, these policy interventions are a “pre-condition” of achieving net zero by 2050.

14.   Clear policy signalling from UK Government gives companies clarity about their own transition risks, enabling them to improve their reporting on them and adapt their business models accordingly. This in turn helps investment managers engage with these companies more effectively to help support them in making the capital allocation decisions necessary to transition to net zero. This policy signalling also provides the requisite clarity to allow investment managers to price assets effectively for the long-term benefit of their clients. 

15.   Pathways to transition should seek to minimise the occurrence of jobs being placed at risk because of the impact of their business on the environment. We would, for example, expect the manufacturer of petrol-powered cars to be well-placed to transition their product to the use of cleaner fuels, thus creating green jobs for existing employees. Without such pathways we may experience a cliff edge effect, with the potential for significant job losses, where businesses lose viability or value as a result of unforeseen policy changes.     

16.   Below is a list of recommended actions which the investment management industry puts forward as a matter of priority, drawing on the recommendations from the May 2019 CCC Report. In each of these areas we believe opportunities exist for the creation of new green jobs or the reskilling of existing employees.

17.   Heating and cooling buildings: UK Government should continue to develop the nationwide insulation programme to lead to a full decarbonisation of buildings by 2050. In this context, we would also draw the Government’s attention to the importance of the work of the Green Finance Institute’s Coalition for the Energy Efficiency of Buildings (CEEB). Their report from May 2020 sets out financial solutions to scale up the retrofitting of buildings.  Moreover, current new build regulations and industry standards should be improved to align with net zero.

18.   Carbon capture and storage (CCS): UK Government should take a lead on infrastructure development, with long-term contracts to reward carbon capture plants and encourage investment.

19.   Electric vehicles: UK Government must continue to support strengthening the charging infrastructure, including for drivers without access to off-street parking. By 2035 at the latest, all new cars and vans should be electric (or use a low carbon alternative such as hydrogen).

20.   Low-carbon power: We must continue to expand rapidly the supply of low-carbon power. Despite existing successes to date with, for example, wind power, UK Government intervention may still be needed, for example, by backing long-term contracts aligned to expected wholesale prices. Policy and regulatory frameworks should also encourage flexibility (e.g., demand response, storage and interconnection).

21.   Land use: Forest cover should increase from 13% of UK land to at least 17% by 2050. With the UK having one of the lowest forest cover percentages in Europe, we would encourage the UK to be even more ambitious in its targets. Policy must also support land managers with skills, training and information.

22.   Heavy Goods Vehicles (HGVs): Vehicle and fuel taxation from the 2020s onwards should be designed to incentivise commercial operators to purchase and operate zero-emission HGVs.

23.   Removal of Fossil Fuel Subsidies: Finally, we would urge the UK Government to use its G7 presidency to renew the commitment to phase out fossil fuel subsidies. Removal of subsidies to the oil sector is vital, in particular, for export financing. Initiatives like the Overseas Development Institute (ODI) G7 fossil fuel subsidy scorecard can provide a helpful tool to track progress.  

24.   Greater transparency is needed across the financial system to enable all stakeholders, including investment managers, to assess the impact that individual companies have on climate change and how they are responding to UK Government ambitions for the UK to be net zero by 2050. Large private companies will also need to play a key role in this agenda and to support the broader efforts and understanding around the management of climate risk and delivery of solutions. As long-term investors, we seek to channel capital on behalf of our clients to companies that are deemed likely to generate sustainable long-term value.

25.   To achieve this, we consider material risks and opportunities to the long-term value of our clients’ investments and make judgements about the relative level of risk and return that is needed to achieve their investment goals. Accurate disclosure by investee companies of data relating to their management of material risk factors (which may include social risks, governance-related, climate-related or pertaining to any other form of environmental risk) helps investors to assess materiality and manage the risks arising from climate change in our investment processes.

26.   In this regard, we welcome the Government’s intention to make TCFD aligned disclosures fully mandatory across the economy by 2025, including for large private companies. As set out above, reporting on human capital is an increasingly important element of these disclosures for higher risk sectors to ensure the impact on jobs is considered in areas most impacted by the transition to a low-carbon economy.

Q8. What additional interventions should be undertaken to aid in a ‘just transition’?

Q9. What impact can green jobs have on the wider UK economy?

Q10. What contribution can green jobs make to the UK’s economic recovery from Covid-19?

27.   The UK is at a critical juncture on a path to honour its commitments to bring about net zero greenhouse gas emissions by 2050 and to achieve the Paris Agreement goals this century. The UK’s 2050 net zero target is one of the most ambitious in the world and the UK Government must continue to display global leadership and galvanise other countries to do the same. 

28.   In 2020, we witnessed a global pandemic bring devastation to communities across the world, disrupt businesses and limit the nature of social interaction on an unprecedented scale, and bringing certain sectors to their knees. With the UK Government now considering how best to trigger a green and sustainable recovery, we are facing a once-in-a-generation opportunity to set out a blueprint for the long-term growth of the UK economy. Action towards net zero emissions and limiting the damage from climate change must be at the heart of that long-term recovery and growth. With the right policy decisions, there is the potential for the UK to benefit from first mover advantage in areas of innovation and technology.  

29.   The investment management industry is already working through the HM Treasury’s Asset Management Taskforce to improve stewardship practices in the UK and published a report in November 2020 on placing stewardship at the heart of sustainable growth. This work will further help strengthen stewardship practices and embed the consideration of material environmental, social and governance (ESG) consideration in UK companies.

30.   We will carry out further work with investment management firms to set out their expectations of all companies in a post-coronavirus economy but especially for those that are seeking additional capital. This will include investment managers’ expectations on issues such as climate change, diversity, executive remuneration, employee ownership and prompt supplier payments.

31.   Climate change is disproportionately impacting the poorest within society, and the pandemic has served as a further driver of inequality, with certain groups having been more heavily impacted than others – typically those with lower earning jobs. As an industry we are aware that social inequality hampers sustainable growth.

32.   There is undoubtedly growing awareness from society at large of the need to act on environmental issues, including climate change. This has been borne out in support for campaigns against the use of plastic; in trends for consumption with a lower carbon footprint (for example meat substitutes); and it is also reflected in investor demand for sustainable investing.

33.   Our industry’s clients and savers are indeed demanding more information and choice as they seek, in increasing numbers, to contribute to climate action through their investment decisions. It is important that our actions to manage the climate crisis do not further exacerbate inequality; we must facilitate a transition to net zero emissions that impacts society fairly. As we set out in paragraph 9, companies should consider the benefits of building resilience against longer term economic trends such as digitisation and greening of the economy for the communities in which they operate.

34.   The UK investment management industry supports the clear message set out by the Committee on Climate Change (CCC) in 2020 that Ministers should seize the opportunity to turn the coronavirus crisis into a defining moment in the fight against climate change.

35.   We do not face a choice between economic growth and climate action. Indeed, while the UK reduced its greenhouse gas emissions by 43% between 1990 and 2019, the UK economy grew by almost 80%[1]. Instead, this is a choice for long-term, resilient economic growth that takes account of the risks and opportunities posed by climate change to the financial system as a whole. Leading economists from across the world have surveyed academics and senior G20 finance ministry and central bank officials on a range of economic recovery policies and found that those policies deemed to have the greatest long-term economic impact were also those that act against climate change.[2]

January 2021