Investing for sustainable growth, not just any growth

With recent rises in gilt yields and a slowing economy, the UK government is under even more pressure to generate economic growth. Last week, the Chancellor announced a raft of measures aimed at stimulating the UK economy. 

However, whilst in the short term, any economic growth may seem desirable, in the medium to long term, some types of growth may be counterproductive. In particular, if they increase economic activity that damages the environmental and social underpinnings of the economy, on which future prosperity depends.  

Investing to support government goals? 

We know there is strong interest in government circles about harnessing UK pension scheme assets to help generate this growth. Under the previous Conservative government, there was much discussion of “productive finance” and interest in freeing up DB pension scheme assets for this purpose. The current government has recently announced plans to relax rules about extraction of surplus assets, with more details expected in the coming months. 

When seeking to increase investment in the UK economy, the government should consider carefully which types of investment and economic activity it wants to encourage.  

The government has some hugely ambitious targets. These include raising living standards in every part of the United Kingdom, building 1.5 million homes in England, and putting the country on track for at least 95% clean power by 2030. If it is serious about meeting these targets, it should encourage investment that will help to deliver them and discourage any investment that would work against them.  

Investing in line with trustee duties 

However, to state the obvious, the purpose of pension schemes is to provide individuals with income when they retire. Pension schemes should not be investing in things (just) to support government goals. It is for the government to ensure that they are attractive investments in their own right, such that pension trustees choose to invest in them, in preference to other assets that might be available. That could include providing a clear, supportive and stable policy environment for those investments, introducing blended finance vehicles that share the risk of early-stage investments, and/or offering fiscal incentives.  

When trustees assess the attractiveness of potential investments, they should bear in mind the paper that the Financial Markets Law Committee published last year that helped to clarify their fiduciary duties when making decisions in the context of sustainability and climate change. It included considering risk and return implications across the pension scheme, not just at the level of the investment in question, and across the various relevant time horizons.  

This suggests that trustees should consider how well any potential investments would support the long-term health of the economic, environmental and social systems that underpin financial markets and hence members’ pensions. In this, trustee and government objectives should be broadly aligned. 

Consolidation: a distraction? 

In November 2024, the Labour government launched consultations on consolidating Local Government Pension Schemes and DC master trusts, hence increasing their scale so they are better able to invest in the UK economy. This is currently receiving much attention in the pensions industry, but there is more focus on achieving scale than on investing differently or improving member outcomes.  

The proposed consolidation would be a massive shake up of the DC and LGPS markets. It would take a lot of time and effort to develop and implement the proposals, and they would not automatically achieve the government’s goal to boost growth. Nor would they necessarily help to channel more investment towards achieving sustainability goals. Indeed, they risk distracting from more immediate actions that might support sustainable economic growth more quickly and more effectively. 

Defining the investments sought 

My colleagues Steve Webb and Laura Myers recently argued that “instead of using scale as a proxy for UK productive finance, the government should instead be explicit about the types of investments that it wants to see” and then introduce a ‘comply or explain' regime for DC scheme investments, whereby schemes disclose the extent to which they had allocated to these types of investment. 

How might the government define the types of investments that it wants to see? As I have indicated above, it could be counterproductive just to encourage investment in the UK economy. As a minimum, it needs to be “sustainable” investment. By this, I mean consistent with healthy environmental and social systems that will support future economic prosperity. 

Tests for sustainable investment 

Defining this more precisely is clearly challenging. However, I offer some initial suggestions. Three tests that could be considered are: 

1. Is the investment aligned with the UK’s commitment to net zero emissions by 2050?
2. Is it contributing to nature- positive outcomes?
3. Is it avoiding significant harm to other sustainability goals, such as the Sustainable Development Goals (SDGs)?

Considerable work has already been done to help answer these questions, including by the Green Technical Advisory Group (GTAG), EU, Paris Aligned Investment Initiative (PAII) and Taskforce on Nature-related Financial Disclosures (TNFD). However, it is important not to get bogged down in deciding whether any individual investment is “sustainable”, given the inherent uncertainties and subjectivity in such an assessment. This is especially important for any disclosure requirements for pension schemes – such as the ‘comply or explain’ test suggested above. If such an exercise became burdensome, it would divert resources from more impactful activity. 

A request to the government 

Therefore, in the first instance, my request to the government is a simple one: rather than focusing on the question of how pension schemes might support UK economic growth, ask instead how pension schemes might support sustainable UK economic growth. In other words, growth which protects – and preferably enhances – the environmental and social underpinnings of the economy, on which future prosperity and pension benefits depend.