By Robert Alster, CIO at Close Brothers Asset Management
In 2019 the UK became the first major economy to put their 2050 net-zero emissions ambition into law. In 2021 the UK government then imposed the Carbon Budget Order, legislating its sixth carbon budget and requiring a 78% reduction of national carbon emissions by 2035 from a 1990 baseline. Supporting the budget was an ambitious Net Zero Strategy setting out policies for each major sector to transition the UK economy in line with the required reduction in emissions and ultimately the pathway to net-zero emissions by 2050.
Since 2021 geopolitical circumstances have changed together with an increasing pressure for climate change mitigation plans to become tangible, detailed actions. Russia’s invasion of Ukraine has compounded Europe’s energy shortage crisis, challenging national energy independence and catalysing extremely high energy prices. Meanwhile, the immediate need for climate change mitigation is ever present; global emissions continue to rise despite an increasing number of net-zero emissions commitments.
The UK government must now balance the prioritisation of energy sustainability as well as energy security and affordability. The benefits of decarbonising the economy are greatly reduced if the security and affordability of energy are not protected. A rapid energy transition would likely exacerbate, or put more people into energy poverty through higher prices and/or lack of access to reliable energy.
The Net-Zero Strategy, the UK’s main pathway for tackling energy sustainability, has been under criticism this year. The Climate Change Committee (CCC), an independent body advising the UK government, found in its progress report on the strategy that it only contained credible plans for 39% of the required emission reductions and 38% of the required emission reductions are either only minimally or not all covered by policy. In addition, the High Court found the Net-Zero Strategy to be in breach of the Climate Change Act because it lacked detailed policies on how emission targets will be met.
The current energy and cost of living crises is a challenge for the UK government to improve its policies for climate action. In a recent YouGov poll only 4% of Conservative members said net zero should be a priority area and it ranked last out of 10 policy areas. This year the UK government extended the Net-Zero Strategy with the Energy Security Bill. The bill was perhaps an indication of the government’s priorities for security although there was clear support for energy sustainability as well with a focus on; grid storage and interconnectivity, energy efficiency, hydrogen production, carbon capture technology and solutions for nuclear waste. The bill, however, did not reiterate plans on the closure of coal-fired power plants by 2024.
The position of climate action in the government’s priorities going forward might depend on the next Prime Minister. Whilst both Liz Truss and Rishi Sunak seem broadly supportive of the UK’s net-zero ambitions both have been criticised in this area. Notably Truss has suggested she would remove the green energy levy, a further indication of prioritising energy affordability over energy sustainability.
The High Court’s judgement on the Net-Zero Strategy recommended that the CCC be given a more pivotal role in the government’s policy setting on climate change. If this happens then the CCC’s recommendations in its progress report could act as a proxy for the development of policy. Most pertinently these include a recommendation to tackle energy affordability and energy sustainability through aligned actions, primarily in the form of demand reduction and building energy efficiency.
To the extent that sustainability pertains to a balance of environmental and social factors for the long term prosperity of people and the planet, the balance of energy sustainability, security and affordability is an important consideration for a sustainable investor. The characteristics of what forms a sustainable investment are still loosely defined in the UK. But given the urgency for energy sustainability, affordability and security, it seems pragmatic for sustainable investors to focus on climate solutions that are economically viable, technologically ready and effective.
The UK government and FCA are seemingly aware of the difficulties that the nuanced debate on sustainable investment terminology can cause in the industry, not the least the opportunity that it creates for investment products to claim they are sustainable when they are not. In response, the FCA plans to follow the EU in creating the UK Taxonomy and Sustainability Disclosure Requirements which will aid investors in understanding whether a business activity or investment product respectively is sustainable. As with the EU green taxonomy, the UK’s version is likely to have strict criteria for the inclusion of a business activity (e.g. steel production). The EU taxonomy has set the precedent for being mindful of the current energy security situation by including gas and nuclear related activities in the taxonomy from 2023. Further FCA consultation is planned for later this year and it is hoped these regulations will add clarity for UK sustainable investment irrespective of the priorities of central government.