Cost of living: Can pension funds justify benefitting from energy company profits?

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As households are staring into the abyss this winter, defined benefit pension funds are among the shareholders of UK-listed oil and gas firms that have seen profits soar thanks to sky-high wholesale prices. Can investment logic still work amid a steep rise in fuel poverty? 
Energy bills are currently only going one way. Regulator Ofgem has recently announced that the new price cap will be set at £3,549 from October, up 80% from the current level. January could bring a further blow, when the cap is expected to breach £4,000 and, some predict, going much higher still. This is a big chunk of the median pay of £31,772 a year. One in three households will be in fuel poverty this autumn, charity National Energy Action predicts. 
Wholesale gas prices dropped last week as the EU worked to intervene in energy markets but have surged again as Russia has switched off the Nord Stream gas pipeline. 
The UK government has responded to calls for taxing the unprecedented profits of oil and gas firms by introducing a 25% windfall tax and providing support to households – with potentially more help to come from new prime minister Liz Truss. Truss is reportedly looking at freezing energy prices by making energy companies take out loans to subsidise bills, which would smooth the current spike but keep bills higher over the coming decade as consumers would have to repay the subsidies. 
Commenting last week, a government spokesperson pointed to the existing £37bn support package and said that “appropriate preparations” were also being made so any additional support or commitments on cost of living could be delivered “as quickly as possible when the new prime minister is in place”.  
“We know people are worried about rising energy bills and direct support will continue to reach people’s pockets in the weeks and months ahead, targeted at those who need it most like low-incomes households, pensioners and those with disabilities, the spokesperson said, adding: “Trustees’ fiduciary duties are clear and it is their responsibility to create an investment approach and make decisions that work in the best interests of their members.” 

Uncomfortable truths?

However, the current situation brings up questions not just about profits of oil and gas producers but about who else benefits from the price hikes beyond the energy firms themselves – with potentially uncomfortable news for trustees.  
The majority of pension funds will have some exposure to the likes of Shell and BP, which have both reported bumper profits, rewarded staff with bonuses and of course paid dividends to their shareholders. Does this pose any problems for pension funds purporting to be integrating environmental, social and governance factors?  
Oil firms have come into the ESG analysis net almost exclusively for their climate impact. Some of the large pension funds have engaged with them on their emissions; BP’s profit announcement came with pledges to invest in wind power and electric vehicle charging, for example. But not putting more emphasis on social factors in their engagement could now be coming back to haunt investors. 

What can trustees do? 

Pension funds have a vital role to play to proactively drive the transition to net zero in line with the International Energy Agency’s guidance, said Peter Uhlenbruch, director of financial sector standards at campaign group ShareAction. 
“With the climate crisis and inequality creating hardship for many people in the UK and globally, it’s more important than ever that pension funds actively use their influence to shape a safer, fairer future,” he said. 
ShareAction wants investors to use their stewardship resources to set clear climate-related expectations and timelines for any holdings in the oil and gas sector, including deploying “a significant portion of free cash flow” into renewable energy and decarbonisation, according to Uhlenbruch. “To be meaningful, this should be matched with time-bound consequences for inaction,” he added. 
Cadi Thomas, who heads up ESG research at consultancy Isio, said the current situation highlights the importance of having an integrated ESG approach. “The energy crisis reinforces the fact that E, S and G issues can’t be considered in isolation; there are clear [links],” she said, adding that "the cost of living crisis [is] emphasising the importance of investors setting social objectives". 
Trustees could for example focus on a particular social issue or target social UN Sustainable Development Goals, such as the No Poverty goal, to address the problem. “These objectives can then feed into investment decision making, from setting your investment strategy, to thinking about investment opportunities and selecting managers,” she said. 
While divestment is often used as a threat, it can sometimes seem that funds are not in reality prepared to renounce to the profits of large firms. Pension funds should look again at their approach to engagement versus divestment and consider at what point they lose faith, defining clear exclusion policies, said Thomas. “These energy firms are a part of the solution of moving us to a lower carbon economy. There may however be a case to divest from firms that aren’t looking to change,” she argued. 
As well as engagement and exclusion, positive impact can be a longer-term approach to the current issues. Investment opportunities in renewable energy and low carbon technology are part of the solution, Thomas said, as are the growing number of socially aware funds. 
“This crisis highlights the need for a holistic, forward-looking approach to ESG integration that doesn’t lead to reactive decision making from such events as this,” she said. 

Should UK pension funds benefit from oil company profits while households suffer? 

Peter Uhlenbruch
Mike Clark
Will Martindale
Amanda Latham

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