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Pensions: Low-carbon Investments

Volume 753: debated on Thursday 20 March 2014

Question for Short Debate

Asked by

To ask Her Majesty’s Government what steps they are taking to help ensure that pension fund investments support the transition to a low-carbon economy.

My Lords, we save for a pension to give us security in retirement. Climate change is putting that security at risk. It risks the financial performance of our pension funds, it threatens to destabilise the wider economy and it could compromise the quality of life of ordinary pension savers now and in decades to come. As the custodians of our savings for a secure retirement, the investment decisions of pension funds should help guarantee that security by mobilising capital away from fossil fuel extraction, which contributes to climate change, towards low-carbon investment opportunities, which can reduce the climate threat.

In this debate I want to outline the clear steps that the Government might take to facilitate this transition. We must give pension funds a stable policy framework. We must provide explicit legal clarity so that they can consider environmental factors in their decision-making. We must extend the rights of pension savers to know how their funds are addressing the risk that climate change poses to their savings.

In the early months of this year, flooding and severe storms brought misery to communities across southern England and Wales. Thousands despaired as floodwater inundated their homes. Hundreds of thousands spent days and nights without power. Experts at the accountancy firm Deloitte have estimated the clean-up cost of the floods at some £1 billion. The Prime Minister was echoing the concerns of many when he told MPs that he strongly suspected recent extreme weather events to be the result of climate change. The Met Office has warned that the UK should prepare for similar events in the future. The flooding showed how climate change is a real and present concern for ordinary people.

However, millions of those people have a stake in the very system that is helping to drive a potential environmental catastrophe. That skewed financial system must be a central part of the solution. UK pension funds account for some £2 trillion of assets. They invest in the goods and services that make our economy. As long-term investors and custodians of the retirement incomes of millions of ordinary people, they are uniquely placed to understand the climate risk. For those funds, that risk is indeed stark. Under every scenario, the effects of climate change on pension funds could be dramatic. If Governments do not introduce effective regulation to reduce emissions, the value of funds’ investments in fossil fuel companies and other high-carbon assets could collapse.

If climate change is allowed to advance unchecked, the effects of extreme weather and the growing volatility of food and fuel prices are likely to hit returns across entire portfolios. The noble Lord, Lord Stern, has estimated that if we fail to act, the total cost of climate change could be as much as 20% of global GDP. Climate change could also create economic and social instability, affecting the spending power of future pensioners and their broader well-being in retirement. Pension funds have a duty to act in the best interests of savers. Given the risk posed by climate change, they should seek to understand the investment implications. By reducing their exposure to high-carbon assets and by taking advantage of opportunities in the green economy, pension funds could help to guarantee the future security and prosperity of themselves and their beneficiaries, and hedge against that climate threat.

Certain barriers mean that this transition is not yet happening. The Government can remove those barriers. Pension funds often perceive low-carbon investments as risky and a significant reason for this is the confusion, and sometimes the infighting, that characterises government policy on tackling climate change. It makes investors uncertain when comments attributed to the Prime Minister describe green levies as “green crap”; it makes investors uncertain when the Treasury delivers a Budget where oil and gas explorers are given a £3 billion tax break to encourage drilling; and it makes investors uncertain when fossil fuel subsidies outweigh those for green technologies. In other words, at present, Governments are not only failing to do enough to promote green investments, they are actively keeping those investments uncompetitive by subsidising high-carbon alternatives.

Where there is currently uncertainty, the Government must provide stability and leadership. To remove this barrier to prosperity and to unlock a potential investment success story, they must make an iron-clad and cross-departmental commitment to catalyse the low-carbon transition. This means phasing out subsidies for fossil fuels and making an active and systematic commitment to developing and commercialising green technologies. As the Commons Environmental Audit Committee found, giving full borrowing powers to the Green Investment Bank by next year would decisively boost green investment and create jobs. That means putting low-carbon solutions at the heart of government plans for infrastructure and industrial strategy.

The type of infrastructure we build now will critically affect our ability to meet our carbon reduction targets in the future, so initiatives like the pensions infrastructure platform should demonstrate a clear direction of travel. As well as having low-risk opportunities to invest in the green economy, the law must allow pension funds to consider the wider benefits of those investments. The ShareAction charity has found that many pension fund trustees feel unable to take account of social and environmental factors such as climate change when making investment decisions. They often interpret their duty to act in the members’ best interests as a narrow requirement to maximise short-term gains.

Although the Law Commission recently stated that there was “no reason” for funds not to use environmental considerations, this position is often not reflected in practice. Investors need clarity and the Government can provide that by clarifying in statute that pension funds are not legally obliged to chase short-term profits at the expense of wider considerations. Will the Minister respond to that?

Savers’ security in retirement depends on how their funds address climate risk and the law should encourage them to take a broad and enlightened view of their members’ interests. Just as the Companies Act encourages directors to take account of environmental considerations and other wider factors in pursuing the success of their company, such a measure for pension funds would enable trustees to focus on long-term, sustainable wealth creation. Again, will the Minister respond to that?

To assess the risks of climate change, pension funds must also have access to high-quality information about the companies that they invest in. The introduction of mandatory greenhouse gas emissions reporting is welcome but this reporting must cover the full extent of a company’s activities and to be useful to investors, that reporting must be objective, reliable and readable. Is the Minister satisfied that the reports produced at the moment achieve the target of giving proper and measured information?

Will the Minister state clearly today that facilitating the transition to a low-carbon economy provides real business opportunities, especially to small businesses? Katja Hall, the chief policy director of the CBI, said this month:

“The UK’s low-carbon transition is already driving jobs and investment. Our green market stands at £120bn and has been growing throughout”,

the recession.

I conclude by saying this regarding the European Union. Criticism was made today by the Chancellor of the carbon trading scheme but if we could engage with our European Union friends on important issues such as the environment, the Prime Minister might be satisfied with a renegotiation which is positive in the way that it approaches these important matters, which affect pension funds and people’s prosperity.

My Lords, I start by thanking my noble friend Lord Harrison for initiating this debate. I agree with every word that he said but that will not stop me saying the same thing in my own words. I declare a past interest as the chair of a public sector pension fund. That was at the Environment Agency and I will mention some of my experience there later on. However, I will start by focusing on the size of the problem.

As we all know—or as most of us accept—the world needs to reduce drastically its carbon emissions and greenhouse gases but, frankly, we are not doing at all well. The IPCC’s fifth assessment spells out that we are on course to exceed by some margin the safe level of a 2% rise in global temperatures, which is not that safe. I will take the measure of carbon intensity because the Americans like that better than some of the other targets. Between now and 2030, we need to reduce our carbon intensity globally by an average of 5% per year. The reality is that in the last five years, which were during a world recession, the carbon ratio fell by only 0.7% per annum so the world is well short of where we need to be. In fact it is the US that has done best, largely by substituting shale gas for coal, but in the emerging economies carbon intensity has actually increased by 5% and most western economies, including our own, have not done very well either. We increased our carbon intensity by 2.6% in the last reported year, which was to 2012, and the world as a whole did so by more than 2%.

As we are, we hope, coming out of recession we would expect the pressure and therefore the carbon intensity to increase rather than decrease. It is therefore a growing problem and to attempt to turn that round needs massive investment in greener technology: from the sources of energy right through to the appliances we use in our homes and on our roads, and from nuclear energy to how you power your own scooter or small car. Investment in those technologies can come from only three sources. The first is the state—as we know, states in most of the world are running through a period of austerity and shortage of funds. The second is the balance sheets of existing companies—we know that quite a lot of money is sloshing around on the balance sheets of many major companies. Unfortunately, that does not include European energy companies, whose balance sheets are not in a great state. We are therefore unlikely to see huge investment coming from that. It will therefore have to come, thirdly, from the markets. We know also that a large chunk of market investment nationally and internationally is deployed by people who, quite contrary to what my noble friend Lord Harrison was seeking, look very much at the short term. Many of the hedge funds and other investor funds around the world are not really likely to invest in technology which has a long-term return.

Pension funds on the other hand are by definition there for the long haul. While there has been a decline in certain types of the better pension funds, they are still deploying vast resources. The people who are dependent on pension funds have to take a long view of the benefit from them. People who are contributing now, in their 20s, to pension funds of all sorts could be receiving, or their dependants could be receiving, benefits relating to that contribution in 80 years’ time, well beyond the targets for the reduction in greenhouse gases.

There should therefore be some synergy between the decision-making of the pension funds and the need to divert investment away from high-carbon energy and high-carbon usage into greener technologies. Unfortunately, there are two problems with that. There is the culture of the pension fund sector on the one hand and there is the unreliability of Governments of all sorts in acting to facilitate this on the other.

On the culture of pension funds, they are risk averse, but they define risk in very conventional terms. They are a bit set in their ways; they are a bit traditional and slow to move. That applies to the trustees of most pension funds, who, as my noble friend said, tend to interpret their fiduciary duty in a rather short-term and narrow way; it applies to the administrators of those funds; it applies to the advisers to those funds, who tend to look at things in stock market terms and seek a relatively short-term return when they choose which equities, bonds or markets around the world they should invest in. It applies also to the actuaries, who have pretty substantial powers in telling funds whether they are viable—indeed, some of the regulations relating to that are pretty constraining of pension funds in terms of assessing their solvency. Actuaries are even more conservative—with a small “c”, I hasten to add—than the pension fund professionals. It applies also to the fund managers who are contracted by pension funds. They tend not to see long-term investment which has some risk as being an area for their investment—yet the greatest risk of all to everybody’s investment is climate change and the drastic effects that it could have on all sorts of investment and all sorts of property. It should therefore be logical that investment policies should be seen through the prism of how they are affected, or likely to be affected, by climate change.

Some pension funds are beginning to do this. It does not mean overturning everything that pension funds do; it means seeing everything through a prism. In investment in equities, it means looking at the type of activities that companies are engaged in; in government bonds, it means looking at the type of view that Governments take; and in particular projects or ownership of property or land, it means looking at agriculture or forestry that is on the greener end of activity. In the Environment Agency, we tried to do that, for everything from our own decisions and right through. It did not mean that we had a completely abnormal range of portfolios; it just meant that some companies were not invested in while others, which were giving a bigger return and some seriously green advantage, were. It is not rocket science for pension professionals to take on that role, and we should do so in all our operations. There needs to be a concerted effort to try to change the culture of the pension fund professionals and those who advise them. It is beginning. One of the papers circulated to us was the Green Light Report, which makes a number of very important suggestions as to how pension funds can conduct themselves. I do not have time to read them out.

The other constraint is Governments. There are some opportunities for Governments here, and some downsides. Two years ago the Chancellor called together some of the major pension funds to try to get them to invest more in infrastructure. I do not know the degree to which there was a green dimension to that, but there could have been. He was thinking of delivering £5 billion of investment almost immediately. I am not sure how well that went but there needs to be some consideration of using that model to bring together the big pension funds and point them towards greater investment in greener technology and low-carbon areas.

Of course, the regulatory framework is also a serious issue. Successive Governments have changed the regulatory framework both for pension funds and the development of green technologies. Just this week we have seen the Budget change rules in relation to money purchase pension funds, which will seriously destabilise investment in insurance companies and annuity providers. We had changes even yesterday in relation to the carbon floor price and therefore the way in which we see a return to green investment. We have a whole history of this—under both Governments, one has to say—with FITs and ROCs changing the rates. We cannot have a regulatory framework for the long term which changes every year, yet the past few years have seen serious changes. My plea to the Government is: let us have some stability and consistency, in relation to both pensions regulation and regulation supporting green technology.

My Lords, I congratulate the noble Lord, Lord Harrison, on getting this debate on to the agenda because it is crucial to our future and our security as a nation. It is also a real pleasure to be in a debate where I did not say the words “climate change” first. It is great that more and more people are understanding how challenging this will be. Earlier this week, I was in a debate on fracking in which proponents of fracking said that we have to frack to deliver our carbon-reduction targets. Even proponents of fracking, which I think is the most disastrous anti-climate change measure, are using climate change as a big stick and something that we have to take into account in the future.

It has already been said that the local authority pension funds have a current market value of around £200 billion. That is a sizeable amount and if it can be manipulated and used in the right way, it can have a huge impact. There have been several reviews of pension fund rules, including the 2001 Myners report, but pension funds are still investing billions in tobacco, arms and fossil fuel companies. My work on this has been trying to encourage various pension funds to invest more ethically but also in a greener way. It is not easy. The noble Lord, Lord Whitty, mentioned that pension funds are risk-averse but the fact is that there is a huge risk if they do not take climate change into account. In fact, the green economy is growing at a steady 4%, with lots of promise, so actually it is not a bad investment.

The big problem is that pension funds could be exposed to what is termed the “carbon bubble”, in that they have invested very heavily in fossil fuel companies and similar, but those assets cannot be used if we are to avoid dangerous climate change. That is a real concern because those pension funds could plunge if that sort of carbon bubble becomes imminent.

The government Budget was depressing yesterday—business as usual, and less green than the previous Budget, if that is possible. I abhor that the Government seem unable to see this problem, which is happening in front of their eyes.

Last year I met with Edi Truell, who is the chairman of the London Pensions Fund Authority, and pressed him to make the authority more ethical, in the sense that it could be more transparent about policies and implementation. My concern was that the LPFA was acting like an absentee landlord, not looking closely at what the companies it invests in are doing: whether they pay the living wage, for example—which should be an automatic component of whether it invests—and, of course, whether those companies are ethically and even soundly run.

I also talked to the London Pensions Fund Authority about positive investments in areas such as energy infrastructure. The fund is currently looking into the possibility of raising £4 billion, with other pension funds, to fund a 620-mile-long cable to Iceland, which would enable us to share enough energy to power 2 million homes. Iceland could be the Saudi Arabia of renewable energy supplies.

For many years people have campaigned to get quite a lot of pension funds to invest more ethically. For example, East Sussex County Council has been lobbied many times. The fund is valued at around £1.9 billion and is one of the largest pension funds in England and Wales. It has been considering one of the three things that should now happen, which I will now propose to the Government.

First, pension funds should sign up to the UN principles for responsible investment. That is an elementary step. Secondly, the Government should require pension funds to disclose much more information; for example, their socially responsible investment policy implementation and performance monitoring. The people who get the pensions want money for their pensions—of course they do—but at the same time they want to feel that they are not raping and pillaging the rest of the world.

Pension funds should also try to make more positive investments. For example, Lancashire County Council’s pension fund has just invested £12 million in the UK’s first community-owned solar development in south Oxfordshire. That sounds like such a win-win situation. It is good for Lancashire and absolutely brilliant for south Oxfordshire.

As I have a little time left, I will give noble Lords the three tests of sustainability. I wrote these for Boris Johnson when he became Mayor of London; I stood over him and made him read them, which was absolutely pointless. However, I will read them to noble Lords. The first test is: does it ask everyone, at every level of society, to do something? It is not enough to expect the Government, or the local council, to fix our problems. We all, as individuals, have to do something, but the Government cannot expect us to do it on our own—everybody must do something.

The second test is: could it cause potential problems downstream? This is one where Greens are absolutely brilliant, because we are very good at spotting potential messes. A classic example is biofuels. People such as Richard Branson were saying, “Fine, I’ll fly all my aeroplanes on biofuels”. In fact, if you grow biofuels, you are cutting down virgin territory and forest, and taking land that could be used for food—and food supply will be an area where we will have huge problems in the future. You have to make sure that you do not create more problems downstream.

Finally, does anything claim to be “the” answer? There is no one answer. The problem of climate change is so complex and diverse that we need 1 million, or 2 million, solutions. As Al Gore says, there is no silver bullet, only silver buckshot. The problem is so complex, so we need complex solutions.

Doing the right thing now will save us money. It might feel expensive, but it will be a lot more expensive—exponentially so—in the future. Therefore anticipating, adapting to and mitigating climate change is absolutely urgent. Pension fund authorities have so much power through their investments that they should be exemplars of how to deal with it.

My Lords, I congratulate my noble friend Lord Harrison on having initiated this debate, in which there seem to be as many chiefs as Indians, which is a bit of a shame. I have spent the past seven years of my life studying climate change, and I would like to take a somewhat more global view than speakers have taken so far, as climate change is quintessentially a global issue.

Not only in this country but across the world, pension funds occupy a peculiarly strategic position within the wider framework of financial markets. They are by definition long-term investors responsible for a far longer investment cycle than the vast majority of other funds. In a world of the immediate, pension funds are obliged to consider the long-term future. Following my noble friend Lord Whitty, that does not mean that they always do so in practice, but in principle they are obliged to do so. Generating a stable set of returns for 20, 30 or 40 years down the line implies having a broad set of ethical imperatives—in other words, the obligation to create stability through their investment decisions; to produce stability rather than just endorse it. I take it that that is really the theme of this debate as a whole.

Sustainability is all about enhancing such stability in a world that is creating huge problems of resource management for its future. In the European Union, pension investments amount to about €8.7 trillion, a gigantic sum of money. About half of that is professionally managed assets within Europe, the rest is public money. It makes complete sense to argue that sustainability—seeking to limit climate change in particular—should be brought to the forefront of pension fund investment. It is in principle a win-win situation as, as other speakers have said, if we are unable to limit the advance of climate change—increasing weather volatility and other changing climatic patterns—we will intrude on that very process of providing security for today’s younger people that it is the object of pension funds to generate.

The framework of emissions reductions set out in the EU’s 2020 programme and beyond provides plenty of inducements for pension funds to invest and, indeed, guarantees a level of long-term protection for that investment. It will be interesting to hear what the Minister thinks of the existing state of affairs within EU countries on that issue, not just in the UK. A number of substantial investments of pension funds have been made in, for example, Germany, Austria and Denmark with regard to environmental imperatives. Most of those, as one would expect, are from public pension funds. However, some more corporate models are emerging. They are interesting and should be studied here. Notable examples I would mention are the Nysted wind farm in Denmark and the proposed Anholt wind farm in the same country. In those cases, the pension fund and the industrial partners collaborate to share both risk and reward, and that would certainly be a viable model here. Denmark, as we know, is considerably in advance of the UK on many of these issues.

In this country, the Green Light Report does what its name indicates: it analyses how pension funds can safely and profitably enter that new territory. The report has a range of comments on the issue that my noble friend Lord Whitty raised. It seems a sensible document and contains a whole series of possible strategies.

I should like to ask the Minister three basic questions. One is simply to follow up on the speeches that have been made so far. It is obvious that public policy will play a key role in ensuring a greater connection between pension funds, sustainability and the limitation of climate change more specifically. What interventions are needed on the level of shareholding law to provide a platform for such long-term investment? Where is our existing legislation inadequate and how might it be improved?

Secondly, does the noble Baroness agree that there should be impartiality between younger and older savers in respect of pension funds and their output for environmental imperatives? That has brooked very large in some European countries, because it helps to structure the nature of the investments made. If the noble Baroness does agree, how can public policy help ensure that this is so?

On my third point, I differ significantly from the noble Baroness, Lady Jones, and from her contributions to the debate on shale gas earlier this week. I call myself an ungreen green: the prime issue facing the world is reduction in global carbon emissions, which overrides most other imperatives, although it does not eliminate them altogether. We have a lot of work to do on this compared to the United States. This has come, not so much from the report discussed on Monday, but from the Breakthrough Institute. This environmental organisation has shown, definitively, that over the past several years the US has reduced its carbon emissions to a greater degree than almost any other country. It has done so because the advent of shale gas has allowed the widespread closure of coal-fired power stations which, as everyone acknowledges, are the most lethal source of CO2 emissions.

Does the Minister agree with this analysis which, as was discussed on Monday, is resonant with implications? Does she agree that pension funds should, subject to strict and responsible environmental regulation, treat shale gas as an effective environmental investment, so long as some of the core issues—especially curbing emissions of methane—are effectively handled? As was said in the report discussed on Monday, this is important because it is relevant, not just to this country, but to the core issues of climate change. The US and China contribute some 42% of total global CO2 emissions. If we cannot effect a change, especially in China, we are not big enough to make a significant dent in this global issue. Shale gas can play an important role, alongside renewable energy, if it is used analogously to how it has been used in the United States.

This has been a worthwhile debate which can have practical consequences. We in the UK should not be too parochial about it. We should recognise its global significance and actively look at best practice in other countries—in the EU and elsewhere in the world—which have deployed pension funds in conjunction with industrial partners. In doing so, they have secured a breakthrough in showing that corporate capital can be harnessed to long-term environmental objectives.

My Lords, I understand that I can speak in the gap, but there is no gap.

The City of London is clearly studying the fact that all the reserves of coal and oil in the ground cannot all be used if we are to meet our objectives. The question then is: will there be government compensation for these false investments? Probably not, but there could be different ways of using this material in the ground. As the noble Lord, Lord Giddens, has been saying, you can use gas from fracking providing that you do not subsidise the water clean-up like the United States. This may be better than burning the coal but, as Shell used to say 15 years ago, if you can change the coal in the ground you can turn it into a different kind of carbon fuel with much fewer emissions.

There are many strategies as you go from existing reserves to energy and they need to be discussed. It is not just suddenly turning off these reserves: they can be used in a variety of ways. This is the important point in any strategy.

My Lords, I, too, thank my noble friend Lord Harrison for initiating this debate and for his stimulating opening remarks.

Since the passing of the Climate Change Act, there has been no denying the size of the task before us, as my noble friend Lord Whitty said. In the past decade, wind and other renewables have grown to the extent that they now provide about 10% of UK generating capacity, with nuclear power generating 16% of electricity. Therefore, a quarter of electricity generation is now low-carbon. That highlights that there is still a long way to go. There is also no denying that it must be government that takes the lead, prepared to pump-prime heavy initial costs and to set the investment framework to ensure that the necessary funding is forthcoming.

Buildings emissions have fallen by 18% but transport emissions have made little progress and are about the same as they were in 1990. There is concern that carbon budgets will be challenging, to say the least, especially as a large element of the reduction in emissions has been due more to the recent economic downturn than to constructive initiatives. Instead of bringing forward increasing investment, this Government have unsettled confidence and overseen decreasing activity. Investment in green energy has fallen to a four-year low, from £7.5 billion in 2009 to £5.3 billion in 2013. Bloomberg figures for asset finance excluding small-scale development show investment falling from £7.2 billion to less than £3 billion and, worse, heading to less than £2 billion.

All speakers today have recognised the contribution that pension funds can make to building a low-carbon economy. There is a green finance gap, with investments currently running at less than half the level needed to deliver the decarbonisation needed to meet emission reduction targets. Pension funds are able to look at the long term for returns, even if they must also have a keen eye on cash generation to meet ongoing pension commitments. Green projects on sustainable energy sources and clean technology include multiple technologies at different stages of development and lengths of maturity. Pension funds have a wide range of investments available, such as equity, infrastructure funds and now green bonds, which are rapidly gaining interest as an asset class.

However, pension funds’ investment in green measures remains very low, at about 1%. The noble Baroness, Lady Jones, highlighted that pension funds have a long way to go regarding the ethical parameters to their operations and investments, but investors will not invest simply because it is green. Many green investments are currently uncompetitive because they involve developing new technologies and have to reach a scale to enable them to become commercialised. Investments usually bear high liquidity and volatility risks and are therefore suitable only for dedicated and sophisticated funds.

A further barrier is the perceived political risk, which is especially heightened internationally, where fossil fuel subsidies often outweigh those for green technologies, thereby keeping green investments uncompetitive. My noble friend Lord Giddens set out the global challenges to long-term security and the international challenges to investor law regarding best practice. It should also be recognised that there is often a lack of expertise and appropriate knowledge among the pension funds.

Government policies are vital to support the commercialisation of new technologies. First, government policies must be consistent, stable and maintained long enough to enable the long planning and gestation periods to mature. Investors need clarity on the development of regulatory decisions, timing and future direction, as my noble friend Lord Whitty said.

Government can encourage business and environmental footprint reporting. On companies’ annual reports and accounts, the Government have introduced regulations to include the requirement to provide information on the company’s environmental impact and how this will affect the performance and development of the company. New carbon reporting for companies could help investors understand carbon impacts and stimulate greater focus on these issues among customers and suppliers, in order to add pressure on companies to adopt more sustainable practices. This work needs to be developed further.

As my noble friend Lord Harrison highlighted in his remarks, ShareAction has questioned whether the duties on directors and trustees to consider acknowledging and thereby mitigating climate change are robust enough. Nevertheless, it is important that companies and funds factor those risks into their decision-making and consider the climate impacts of investments as part of their wider social and environmental audit and risk assessments.

Green infrastructure funds are also likely to be an important way for pension funds to pool resources and invest in a portfolio of green projects. In that regard, the establishment of the Green Investment Bank has been vital in using public money alongside the private sector. However, the Government must show clear determination to follow through policies with cross-departmental commitments. Although this Government have a dislike for targets, such targets could nevertheless demonstrate the Government’s commitment to make things happen and underline where corrective action may become necessary.

At the end of our debate on the statutory instruments to implement the Green Deal, I asked the Minister if she would share what success might look like on this very important initiative to enhance the energy efficiency of our homes. Although she would not commit to a figure, the Minister in the other place said that he would be having “sleepless nights” if fewer than 10,000 people had not signed up to the Green Deal within its first year. Just 1,221 households have signed up and only 746 measures have been installed.

Although it is good that the Green Investment Bank has provided funding for the Green Deal and its energy efficiency schemes, does the noble Baroness agree that the scheme urgently needs to be reviewed, especially in regard to the interest rates levied, and undertake corrective action? It is most important that the Government provide clear and consistent environmental policies which will fix market failures and give institutional investors the confidence to invest in green projects. Without these policies, climate finance from pension funds will not be forthcoming and we will all be having sleepless nights.

My Lords, I thank the noble Lord, Lord Harrison, for opening this debate and all noble Lords who have contributed. This important debate allows me to lay out what the Government are doing to ensure that we have in place an environment of certainty for long-term investment. Above all, we must strive for certainty for low-carbon energy policy, a certainty which allows all investors and pension investors in particular to fund energy infrastructure. The current low-carbon investment regime provides this certainty, which, in February this year, led to the manager of a pension fund owned by the state of Quebec acquiring a 25% stake in the 630-megawatt London Array offshore wind farm for £644 million.

There have been several other major pension investments in solar PV projects supported by the small-scale FIT scheme, notably by Aviva insurance. PensionDanmark has also made a number of UK investments in renewable obligation-backed projects. As we complete the much needed reforms to the energy market, we need to ensure that policy stability sustains and investments continue at pace.

The central ask of the pension community is long-dated, index-linked products which deliver stable returns from assets that are well understood and low-risk. Pension companies are not looking for a fast buck; when they invest they are in for the long haul. Our new contracts for difference are private law, long-term contracts which seek to remove the volatility risk associated with the wholesale energy market. The returns from these contracts will be index linked to ensure investments retain their real value.

We have also provided a back-up route to market through our off-taker of last resort provisions. This further reduces risks for debt and equity providers, and improves competition and liquidity in the power purchase agreement market. The transition from the renewable obligation to contracts for difference is being taken forward in a structured manner and our reforms will ensure that our targets are hit at the lowest possible cost to the taxpayer.

The Government have three objectives for energy policy: to keep the lights on, to keep energy bills affordable and to deliver our climate change goals. To achieve the necessary change, I was privileged to lead the Energy Bill through this House, and the Energy Act 2013 is now law. The Act provides the legal and financial mechanisms necessary to attract the investment that we need and at the right price—investment which could support up to 250,000 low-carbon jobs by 2020.

Noble Lords have raised a number of questions and points. I shall try to answer as many of them as I can. Where I feel that colleagues in other departments may offer greater detail, I will ask them to write to the Committee.

To the noble Lord, Lord Giddens, I say that I am pleased to be chief and extremely proud to be an Indian—so that ticks both of the noble Lord’s boxes. I turn to the more important points. The noble Lord, Lord Grantchester, touched on a range of issues which I think were covered in my speaking notes, but I remind him that the EMR, the biggest reform of the electricity market since privatisation, was done under this Government. We wanted to provide investors, particularly in the renewable, low-carbon sector, with long-term certainty. The previous Government, of whom the noble Lord was a supporter, had 13 years during which they knew that 20% of current electricity power generation would come off grid by 2020. They failed to address that issue and we must now, sadly, play catch-up in a range of areas. We have to accept that there are issues at stake.

To the noble Baroness, Lady Jones, I say, yes, of course, we all sign up to individual responsibility. This Government and the party opposite had complete consensus when we worked through the Climate Change Act 2008 to ensure that we as a country set standards and examples for the world to follow. However, we cannot do it at any cost; we have to see how it impacts on consumer bills. The noble Baroness gives a deep sigh, but I say to her that, when you are in government, you have to take a whole load of decisions. Some of those decisions may not be taken as quickly as we would like, but they have to incorporate consideration of their economic impact on all our consumers, not just a small section of them.

We will remain on track to being the greenest Government ever—that was a promise and a pledge that we made and the Prime Minister has reiterated it. We have through the Treasury set a levy control framework of £7.6 billion up to 2020. So I do not think that there is any lack of ambition on the part of this Government to deliver on low carbon if they are putting in that sort of up-front surety and investment.

Some of the more detailed points raised by the noble Lord, Lord Whitty, around pension funds will need to be responded to by other colleagues in more detail. I will ensure that the appropriate colleagues receive a note from me after this debate.

The noble Lords, Lord Whitty and Lord Giddens, mentioned other countries. I am pleased that China has taken some very big steps towards addressing its carbon emissions. We are seeing great progress in its building of offshore wind—it is building more offshore wind capacity than any other country. It has recently created its own renewable feed-in tariff for solar. Its manufacturing sector has significant wind turbine and solar companies. It is also investing heavily in new nuclear.

I turn to India. I read an article very recently on advice it took from us at DECC on the 2050 calculator. It has incorporated the 2047 calculator to see how it can address issues of introducing more renewable energy.

Would the noble Baroness agree that there is a massive possibility in China for the development of pension funds in relation to environmental issues? There are no pension funds in China: it is families who save. The country has to build a welfare system from the beginning and therefore, at least in principle, has the opportunity to circumvent some of the difficulties we find in western countries.

The noble Lord raises a very important point. We should be actively having this sort of discussion with all our global partners.

Since 2010, this country has seen £35 billion of investment in the renewable sector and there is £20 billion more in the pipeline. I would dispute with anyone who says that investment is not coming here. The noble Lord, Lord Grantchester, thinks we are not attracting investment. We have attracted more investment than did the noble Lord’s party when it was in government. It is not a competition. The noble Lord, Lord Boateng, did not speak in the debate but he may shake his head. We have significant investment coming through, with new nuclear as well as the renewable sector. We should be proud of being a country that people want to invest in and of offering an environment that enables the investment to come in.

I am always mindful of time. The noble Lord, Lord Whitty, also mentioned the National Association of Pension Funds—I think that it was the discussion around a national pension fund that the Treasury may have raised in 2011.

The Chancellor said he was bringing together the large pension funds to look at their investment in infrastructure.

My Lords, I am told that I have two minutes. We have made progress. A £500 million fund to be managed by Dalmore Capital will, hopefully, be unveiled and be available. I think that is the fund the noble Lord is referring to, but I will read Hansard and make sure.

The noble Lord, Lord Whitty, also mentioned the carbon floor price. We have to establish a price that sends a credible signal to help drive billions of pounds of investment in low carbon energy generation. However, we also have to put it against what is happening with our partners and member states. We cannot let our industries be at a disadvantage because we have not been able to reduce the burdens on our energy-intensive industries.

I have been told that I need to sit down very soon, but I would like quickly to touch on the reference made to the Green Deal by the noble Lord, Lord Grantchester. I remind the noble Lord, over and over again, that this is a very long-term programme. We did not come in singing it with bells and drums, but it has seen significant measures being put in place. We have seen over 500,000 measures installed under ECO. The noble Lord must be aware that some may have used the Green Deal bank but others may have their own finance.

Committee adjourned at 5.59 pm.