DESPITE all the hype, it looks like COP26 has ended as COPOUT26. World leaders believe it is private-sector investment which will lead a transition to net zero. Citizens are being asked to alter their behaviour and their choices – for example by boycotting products associated with deforestation.

Campaigners are targeting pension funds calling for disinvestment from fossil fuels. However, while pension funds do command huge amounts of capital, there are serious obstacles which will prevent this from happening in any meaningful way.

What is missing from the conversation is the crucial role of governments in leading the process of decarbonisation. If private-sector investment is to support decarbonisation it is for governments to create the monetary and legal frameworks to make this happen.

An article in The National on November 3 (COP26: Campaigners press Scotland’s councils to divest from fossil fuels) reports that the Scottish local authority pensions funds (LGPS) have investments of £1.2 billion in fossil fuels (out of a total of £55bn of assets). It is vital that they do disinvest from fossil fuels if we are to decarbonise but eliminating the obstacles that stand in the way requires intervention by the state.

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Firstly, a pension fund acts only in the “best interests” of its own members. It has no interest in the impact of its actions on other pension funds or on anyone else. Pension funds do not, therefore, act collaboratively when making investment decisions. The way pension fund performance is measured, which is purely in financial terms, leads them to compete with one another rather than collaborate and to adopt “herd behaviour” – copying strategies of the most successful funds in the attempt to replicate that success for themselves.

Pension fund trustees (and local councillors on LGPS pension committees) are obliged to act in accordance with the law of “fiduciary duty” which is based on Trust Law. Trust Law is judge-based and has been built up over many years of legal precedent.

It has at times been modified by statute and regulation but remains the legal framework which requires pension trustees to act in the “best interests” of the beneficiaries (pension scheme members). “Best interests” is deemed to mean “best financial interests”. The interests of the wider public (including other pension scheme beneficiaries) are treated as irrelevant.

Pension trustees are loathe to disinvest if they believe (or are advised) that there is money to be made from an investment. So, for as long as fossil fuel companies are allowed to continue to operate, investment returns will be possible for pension funds, and disinvestment will continue to be treated as inconsistent with fiduciary duty.

Only the state has the power to make new laws which redefine or replace entirely the current law of fiduciary duty. The UK Government has curtailed fiduciary duty in the past which demonstrates that it can be done if there is the political will to do so.

The 1995 Pensions Act prohibited any pension scheme from investing in the company which sponsors it, thereby imposing some limit on the freedom of pension trustees when making investment decisions.

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As a minimum, pension funds should have mandatory obligations to align their investment strategies with real decarbonisation (not just net zero). But regulatory reform could and should go much further and oblige pension funds to consider the wider public and national interest in their investment


THIS means disinvesting from fossil fuels is only part of a wider agenda which includes supporting the domestic ownership of our own national assets and businesses and aligns pension fund investment with a national industrial strategy and other economic and social priorities.

A further hindrance to fossil fuels disinvestment is the absence of alternative investment opportunities which are suited to providing the returns and the liquidity needed to pay pension benefits when they fall due. Again, there is a crucial role here for the state to play.

Governments could issue long dated “green bonds” with an attractive rate of interest. Government bonds are the safest asset class for pension funds because they provide liquidity from the flow of interest payments and the existence of secondary markets for the buying and selling of government bonds. Governments with their own currency can always repay their bonds.

By authorising central banks to undertake “Green QE”, governments could offer the means for central banks to buy up fossil fuel financial assets such as shares and corporate bonds. Central banks would thereby provide cash in exchange for such assets – and that cash can then be reinvested in decarbonisation projects. If central banks acquire fossil fuel assets in this way they can no longer be traded, which will drive the market value of such assets down.

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We could call this form of QE “carbon finance capture and storage”. Such QE operations by central banks would need to be time limited to exclude any new fossil fuel assets acquired or retained by pension funds after a specific date. Without this the incentives to disinvest would be undermined as Green QE would then be seen as a state funded insurance scheme which protects reckless investors from losses.

Campaigners for fossil fuel disinvestment would be well advised to consider extending the focus of their campaigns to governments and pension regulators. If they do so, they may well find that pension fund members and trustees will join them and provide added momentum to the effort.