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Red Light, Green Light

The UK’s net zero transition depends on huge amounts of private capital that can only be unlocked through climate policy certainty. 

In a recent podcast interview, Chris Skidmore, former Minister and Chair of the UK Net Zero Review, said net zero commitments being made around the world “are but words on a page unless we have that sense of delivery and progress”.  

But, as outlined in Conservative MP Skidmore’s own independent review, the UK government’s progress so far leaves much to be desired. In fact, the review noted an absence of climate policy certainty for businesses and investors, which has limited the materialisation of long-term, stable investment plans.  

As members from the upper echelons of government increasingly take a, well, ‘conservative’ view on climate action – a far cry from 2019, when the country became the first major nation to sign its net zero by 2050 commitment into law – there is mounting concern the UK is at risk of falling off the podium of global leaders in the net zero transition.  

“Until recently, we [the UK] have been an international leader in the climate transition,” Ed Matthew, Campaign Director at think tank E3G, tells ESG Investor. 

“Despite ambitious targets, the government hasn’t been prepared to put in place the regulations, legislation, public funding or tax incentives needed to enable the economy to get on track across the board, and it’s becoming a serious problem,” he says. 

The matter of net zero has instead become short-term “political fodder”, Matthew adds, noting the Conservative Party’s disastrous by-election results earlier this year has prompted a series of row-backs in climate ambition to curry favour with lost and wavering voters. 

“It’s a dangerous game to play, and it is undermining investor confidence; there are certain issues, like climate change, where political games shouldn’t be played.” 

Matthew isn’t the only one dissatisfied with progress.  

In June, the UK’s Climate Change Committee (CCC) published its latest progress report, warning that the UK “has lost its clear global leadership position on climate action”. 

Following a successful legal challenge last year against the UK government’s net zero strategy, green groups are now challenging the updated strategy, published in March, arguing that it still does not provide sufficient measures to fulfil the decarbonisation targets committed to under the Climate Change Act.  

All this has combined to create an environment of uncertainty for investors, according to Tessa Younger, Stewardship Lead for the Environment at CCLA Investment Management, noting how climate policy must be consistent in its direction and messaging if sufficient private capital is to be channelled into relevant projects and initiatives.  

In late August, financial institutions collectively managing £1.5 trillion (US$1.89 trillion) in assets wrote to UK Prime Minister Rishi Sunak, asking for enduring clarity from the government to facilitate the annual investment requirement of £50-£60 billion to reach net zero by 2050. 

“To protect the UK’s competitive advantage as the world’s largest net exporter of financial services, purposeful and predictable sustainable finance policy is fundamental, and can help position the country’s financial services as a global leader in green investment,” says Shipra Gupta, Investments Stewardship Lead at Scottish Widows, a signatory of the letter, which was compiled by the UK Sustainable Investment and Finance Association (UKSIF).  

Go like the wind 

The global energy crisis, sparked by Russia’s invasion of Ukraine, highlighted the importance of ensuring a steady flow of domestic, sustainable energy supply. 

However, experts agree that the UK’s response to the crisis was sluggish, and progress upscaling domestic renewables capacity and power generation has suffered as a result.  

“Renewables are not yet on a level playing field with other sources of electricity production connected to the grid, with projects facing delays of up to a decade in connecting new capacity,” adds Younger.  

The UK is also falling short on clean energy investment, according to a February report published by trade association Energy UK, which identified a £62 billion shortfall over the next decade – the equivalent of 54 gigawatts (GW) of potential wind and solar capacity. 

Fortunately, renewable electricity capacity did increase last year, the CCC report noted, albeit not at the rate required to meet the government’s decarbonisation targets. 

Wind generation increased by 24% in 2022 to 80 terawatt-hours (TWh) following a 3 GW increase in capacity, the CCC report said, adding that solar generation reached 14 TWh in 2022, a 15% increase on 2021 levels.  

As a small island beset by grey skies more often than blue, energy generated by offshore wind power has long been considered the strongest renewable option.  

But here, too, progress has stuttered. 

Introduced in 2014, the UK’s Contracts for Difference (CfD) policy aims to provide a publicly funded support measure for larger scale renewable energy projects, protecting project proponents from changes to the wholesale electricity price and providing a guarantee of a steady revenue stream, thus reducing investment risk for private investors.  

While the government confirmed last week a record number 95 clean energy projects across onshore wind, solar, tidal energy and geothermal were granted a share of the £227 million in CfDs this year, not a single offshore windfarm bid was accepted.  

This year’s auction was split to ensure less established energy sources could better compete with wind projects for CfDs, but experts speaking to ESG Investor argue that the CfDs were not priced to account for spikes in costs due to inflation and supply chain disruption, thus decreasing investor appetite.  

“The CfD scheme has historically been very successful at bringing costs down for many renewable technologies,” says Esin Serin, Policy Fellow at the London School of Economics Grantham Research Institute on Climate Change and the Environment (LSE GRI). 

“But the international context has evolved, and the climate transition race has accelerated with the launch of the US Inflation Reduction Act (IRA) and the EU’s Green Deal Industrial Plan […] why would an investor want to invest in UK renewables if there are much more conducive economic incentives elsewhere? 

“The fact the government didn’t listen to industry concerns ahead of the latest CfD outcomes for offshore wind perhaps implies a level of complacency,” Serin says.

Investing in the development of onshore wind has also been a challenge, thanks to planning laws introduced in 2015 which allow one objection from a local resident to halt an entire onshore wind project.  

Earlier this month, the UK government removed this rule, but industry experts claim the change still doesn’t go far enough, with the planning system stacked against project developers.  

“The UK government’s promise on onshore wind also comes about a year too late – another example of its too slow response to the energy crisis,” says E3G’s Matthew.  

Keith Guthrie, Deputy Chief Investment Officer at pensions risk and investment management provider Cardano, points out that, while it’s important to better facilitate investment in onshore and offshore wind projects, “the government needs to be more technology-agnostic”. 

“We need to be giving every potential low-carbon technology backing at this stage,” he says, adding that the transition is such a complex and wide-ranging issue that a variety of solutions will be needed to tackle it effectively.  

Other areas of focus, Guthrie says, should include green hydrogen, critical minerals and battery storage. 

“We continue to hear from our members that there is capital available to help fund new projects and technologies that could generate sustainable returns for clients and savers, but that the pipeline of projects, including in clean growth industries and other growth sectors of the future, remains lacking,” says Oscar Warwick Thompson, Head of Policy and Communications at UKSIF. 

He notes there are a number of non-fiscal interventions that can be considered by the government, including reforms to the planning and permitting system for renewable projects, skills, and high-quality regulation – all of which would help to unlock investment in the economy.  

Mixed messages  

Despite the UK government’s apparent support of the clean energy sector, there remains strong ties to the oil and gas industry, which concerns environmentally focused investors. 

This summer, Sunak agreed to grant hundreds of new North Sea oil and gas licences to boost the UK’s energy independence, arguing that the decision is entirely consistent with the country’s climate commitments and that the government is determined to transition to net zero in a “proportionate and pragmatic” way. 

According to the CCC report, the UK will continue to need some oil and gas fields until it reaches net zero, but this “does not in itself justify the development of new North Sea fields”. 

Warwick Thompson says it is vital to reduce reliance on fossil fuels to minimise the risk of stranded assets.  

“The government needs to ensure the right policy landscape and incentives are in place in the economy for private finance to flow to the right areas, and away from the continued expansion of fossil fuel production,” he says.  

Instead, as the energy crisis sent consumer energy bills skyrocketing, the government chose to hit clean energy with the windfall tax, but not oil and gas.  

“From an investor’s perspective, there is concern about this continued support for the oil and gas industry, because it’s unlikely the UK is ever going to be the lowest cost producer of oil and gas globally,” says Guthrie. 

“There’s a very good chance these [North Sea] assets become stranded in ten to 15 years’ time, which is a terrible outcome for investors.” 

The CCC progress report called on the UK government to set out a clear position on exiting oil and gas, referring to its decarbonisation commitments outlined in the North Sea Transition Deal and Carbon Budget Delivery Plan (CBDP).  

In his recent interview with Jason Mitchell, Head of Responsible Investment Research at Man Group, Skidmore also questioned the “economic sense” in continuing to invest in new oil fields that won’t go on stream until at least 2047.  

“[Twenty-four years] is the average length of time it takes from the actual granting of an exploration license to the drilling taking place,” he said. “The reality is that our oil and gas usage will have dropped to the point where other industries and other technologies will be far cheaper to use.” 

Earlier this year, Chancellor of the Exchequer Jeremy Hunt also unveiled a raft of measures to facilitate the climate transition, including £20 billion committed to the development of carbon capture, utilisation and storage (CCUS) technologies.  

It remains a controversial technology, given that it hasn’t yet worked at scale, and many see it as simply a way to extend the shelf life of fossil fuels.  

“This government is very close to the oil and gas industry,” claims E3G’s Matthew.  

“They have donors from the industry, and some members of the government have a working interest to bolster oil and gas prospects.” 

NGO Global Witness found that UK government ministers met with fossil fuel companies 54 times between January and March this year, the equivalent of 20% of all lobbying meetings the government held during that period.  

Oil and gas majors BP and Shell signed deals with the IT company founded by Sunak’s father-in-law, Global Witness said, further noting that the Conservative Party and its MPs registered £3.5 million in donations from climate sceptics, fossil fuel interests, and high pollution industries.  

Game plan

Despite concerns, there are several welcome changes in the regulatory pipeline for UK-focused investors, including the Green Taxonomy, sustainability reporting rules, and finalised guidance on transition plans – the latter of which is expected in October. 

However, experts speaking to ESG Investor are calling for increased certainty and policy consistency going forward.  

Our members continue to require greater confidence in the government’s long-term commitment to its net zero plans to allow investors and their investee companies to make multi-billion-pound investments in the UK’s sustainable economy of the future,” says UKSIF’s Warwick Thompson. 

“Recent signals risk eroding this trust, and instead a purposeful and predictable policy environment can position the UK as a global leader in green investment, driving growth across the country.” 

He urges the government to reiterate its commitment to the 2030 target to phase-out vehicles with internal combustion engines (ICE), following recent doubt and an ongoing review. 

In February, the CCC also called on the government to bolster its climate adaptation focus, warning that flooding, nature restoration and infrastructure resilience alone will require a minimum £10 billion of investment a year to prepare the UK for the expected impacts of climate change. 

Ultimately, the UK must respond to the US IRA and EU NZIA in its Autumn Budget in November if it is to stand on the climate podium. 

“We need a Net Zero Investment Plan,” says Matthew, noting that there are “high levels of support among investors”. 

“It would set out key sectors requiring investment, how much money is needed to align with the government’s targets, how much of that investment need will be met by existing policy, and how private investors can plug the gaps.”  

Matthew acknowledges that it’s “unlikely” the UK will be able to compete with the US when it comes to the scale of financial incentives, and that the plan will have to be very focused on areas the island has some level of “competitive ability or advantage”. 

“But the money will flow. The money is there. There is an appetite to fund the transition from the investor community, but opportunities have been significantly curtailed by lack of government action,” he says. 

“It feels as if the government is currently frozen in time, making incremental changes that simply won’t do enough.” 

There remains a big question mark over the degree of climate-related ambition the government will have within the Autumn Budget, but experts remain hopeful that it will go some way to providing the certainty they sorely need to effect widespread change. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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