UK’s net zero u-turn raises challenges for transition assets

While the U.S. and Europe are gearing up their policy efforts to attract investment in renewable energy, the UK government made headlines for backtracking on some of its earlier climate pledges.

This leak came at an awkward time for the UK government, with the UK’s minister for Energy Security and Net Zero attending the New York Climate Week.

Could this undermine the case for investing in the UK’s renewable energy sector?

A leaked report obtained by BBC news revealed yesterday that the UK government plans to push back a ban on sales of new petrol and diesel cars by five years to 2030. This would bring the UK in line with EU standards, where the sales on internal combustion engines will be banned from 2035 onwards. The 2030 target had been UK policy since 2020.

Sunak is also reported to delay the phase-out of oil and gas boilers to 2035, postpone the ban on off-grid boilers and scrap plans on new energy efficiency regulations on homes.

Need for cash

The UK government’s backtracking on net zero policies could impact the investment case for net zero assets. Unlike in the U.S. and EU, where the transition to renewables will be financed through significant subsidies such as the Inflation Reduction Act's $369 billion commitment and the EU’s €45 billion Green Industrial Plan, the UK government aims to fund most of the transition by attracting institutional investment.

Jeremy Hunt’s recent Mansion House speech underlined this point. While the UK chancellor did not outline mandatory requirements for UK pension funds to invest in specific industries, the government is keen to introduce a minimum 10% investment in private equity for local government pension funds, a measure which it hopes could indirectly attract net zero investments.

Moreover, some of the UK’s largest DC master trusts have signed a Mansion House Compact, committing them to allocate 5% of their default fund portfolios to private equity.

But with the UK government set to backtrack on its net zero ambitions, have these investments just become less attractive?

The initial response by the UK Sustainable Finance and Investment Association (UKSIF) was scathing. James Alexander, CEO of the industry body warned that the UK government’s “wobble on its climate commitments” damaged investor confidence and put the UK’s economic future at risk:

“The UK has a strong record in tackling climate change, but any backwards steps will undermine confidence in our transition to net zero, deterring investment away from the UK and putting at risk the jobs and growth that come with it.

“Transitioning to net zero presents a huge economic opportunity, as leaders in the U.S., EU and elsewhere recognise, but ignoring investor invoices will only reduce the UK’s share of this global prize” he added.

Investor backlash

But perhaps the fiercest backlash came from the UK’s auto industry with the chair of Ford UK, Lisa Brankin warning that the UK government’s move undermined Ford’s existing investments in electrification. The U.S. car giant plans to invest $50 billion globally in the development of electric vehicles.

"This is the biggest industry transformation in over a century and the UK 2030 target is a vital catalyst to accelerate Ford into a cleaner future. Our business needs three things from the UK government: ambition, commitment and consistency. A relaxation of 2030 would undermine all three. We need the policy focus trained on bolstering the EV market in the short term and supporting consumers while headwinds are strong: infrastructure remains immature, tariffs loom and cost-of-living is high” she warned.

Her stance was welcomed by Adam Matthews, chief responsible investment officer for the Church of England’s Pension Board who argued that corporations had a role to play in holding policy makers to account. “When investors talk about responsible climate lobbying - this is what it looks like...not just ensuring trade associations are lobbying in line with company commitments but also companies are on the front foot pushing for the regulatory framework they need to deliver on their commitments to be net zero” he said.

Later that day, a collective of more than 400 investors and major UK corporations, including Border to Coast,  Brunel Pension Partnership, Aviva, the energy giant EON  and IKEA UK joined forces to condemn the government's weaking of net zero targets in a joint letter to the prime minister, urging him not to backtrack. 

"The business community has already made substantial investments in the net zero transition and made it clear that sticking to long-term net zero policies is crucial to build business confidence and mobilise investment. Watering down these policies would damage the UK’s credibility as a good place for green investment, undermining British competitiveness. We are already losing investment to the US and EU, and rowing back would make it worse" the letter said. 

On the ground

But despite ongoing policy uncertainty, many UK institutional investors are committed to further backing the rollout of renewable energy with the LGPS Pools in particular taking an active interest.

For example, Wales Pension Partnership has announced a major investment in Welsh Wind Parks yesterday and infrastructure platform GLIL revealed a £150 million investment in UK energy storage infrastructure last week.

Paul Guilliotti, assistant director at Richmond and Wandsworth Councils, is responsible for the merged pension fund for both authorities. The Wandsworth Pension Fund has announced a major investment in heat pumps earlier this year. But with the phase-out of gas boilers being pushed back, does he regret the decision?

 Guilliotti believes that the case for investments in the energy transition is still there. But amid policy challenges, local authorities might have to step up their game.

“In order for local authorities to achieve their area’s (rather than pension fund) net zero targets they need the support of partners which include central government, local residents and businesses and well as investors. Our investment and belief in greener energy is not determined by a fixed date, it’s about achieving a healthy risk-based return.

“This change could therefore mean that there will be more opportunities for investment as Local Authorities will need to take more direct action to achieve their aims if central government are not going to. The UK needs to be self-sufficient for its energy requirements and the only way that this can be pragmatically achieved is through renewable energy so we need to find a way that the country has suitable infrastructure to achieve this and therefore we believe energy transition investment is the way forward” he added.