UK Fails to Reassure Investors on Net Zero Commitment
Autumn Statement criticised for supply-side focus, but promises of pension reform pique interest.
The UK government has “comprehensively failed” to set out a robust green industrial strategy to compete with other countries leading the way in the transition to net zero.
This is the view of experts speaking to ESG Investor in response to Chancellor Jeremy Hunt’s 2023 Autumn Statement on 22 November, which many investors had hoped would increase certainty around the government’s climate policy ambitions following months of u-turns and rollbacks.
The statement reaffirmed green investment commitments and outlined intentions regarding infrastructure investment by pension schemes, but left many feeling underwhelmed.
“The UK has comprehensively failed to set out a green industrial strategy or the scale of incentives and tax breaks to put us on track to compete in the race to zero,” Ed Matthew, Campaign Director at think tank E3G, told ESG Investor.
Yesterday, the Chancellor restated his commitment to invest £4.5 billion between 2025-30 in strategic manufacturing through the Green Industries Growth Accelerator. This includes £2 billion for zero-emission investments in the automotive sector and £960 million to accelerate the manufacture of green technologies and energies like offshore wind, hydrogen, nuclear, and carbon capture and storage (CCS).
This follows the UK Spring Budget in March, where the government pledged up to £20 billion in funding for the early development of CCS technologies, building on a previous £1 billion commitment to create four carbon capture, utilisation and storage (CCUS) hubs by 2030.
“£3 billion in additional green subsidies to 2030 is frankly peanuts,” said Matthew.
“Compare this announcement to the US$369 billion that the US government put on the table.”
US President Joe Biden signed the IRA into law in August 2022, pledging to aid the country’s climate transition through tax credits, grants and subsidies designed to incentivise the market to ‘swing green’.
In response, the EU introduced the Net Zero Industry Act (NZIA) at the beginning of this year, which will run through to 2030 and aims to increase funding for upscaling domestic clean energy technologies across member states, thus reducing dependence on other countries.
On 21 November, the EU Parliament delivered its verdict on the NZIA.
Muted response
The UK government’s March response to MP Chris Skidmore’s Net Zero Review backed the review’s conclusion that net zero is a growth opportunity and that decisive action is needed.
“Other countries such as the US with the IRA are moving quickly, and we must do the same,” the government said, pledging to review options for providing longer-term certainty to a small number of major priorities for net zero at the next spending review.
However, earlier this year, Hunt said that the UK will not go “toe-to-toe” with the US and EU.
The government’s decision to use supply-side measures to boost business investment toward net zero, rather than more directly “engaging in a subsidy race”, is going to take more “explicit effort” from the government to “repair the damage it has done to investor confidence on net zero in recent months”, according to Esin Serin, Policy Fellow at the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (GRI LSE).
A “fuller response” to the IRA and NZIA would have ensured the UK went beyond building net zero infrastructure, maximising benefits from the supply chains of such infrastructure, “both economically and socially”, Serin told ESG Investor.
Matthew from E3G highlighted its call for a Net Zero Investment Plan, now backed by financial institutions with a collective £10 trillion in assets.
“The Treasury is obsessed with supply-side measures because, when it comes to the crunch, they are not prepared to put the public investment in place needed to help UK companies to properly compete,” he said, warning that “we will all be the poorer for it”.
Bolstering connectivity
Hunt also announced a series of measures to improve power grid connections, taking on the recommendations of the Winser Review published earlier this year.
This includes the promise of up to £10,000 compensation over ten years for those living closest to new energy generation and transmission infrastructure, in a move to speed up planning approval.
The government must ensure fairness on the question of who pays when it comes to compensating residents, Serin said.
“Recovering policy costs from energy bills already impacts low-income households disproportionately and should not be the approach taken to fund new measures such as this,” she noted.
Following the Autumn Statement, the Office of Gas and Electricity Markets (Ofgem) published a statement noting that a Connections Action Plan (CAP) will accelerate onboarding of wind, solar and battery power generation to the electricity grid, tackling delays in the current connection queue by “releasing over 100 gigawatts (GW) of capacity for new projects”.
This is around a quarter of the electricity needed to power the economy in 2050.
CAP aims to cut the average connection timeline from five years to six months.
Matthew welcomed action to unblock grid access but pointed out the Conservative government “have had 13 years to sort this out and the grid is in crisis”, with far more is needed to reform planning laws to ensure renewable projects are not blocked by local authorities.
Oscar Warwick Thompson, Head of Policy and Communications at the UK Sustainable Investment and Finance Association (UKSIF), told ESG Investor that grid connectivity has been “one of the long-standing barriers for renewable energy developers, investors, and businesses”.
In October, the International Energy Agency (IEA) published a report warning that a global lack of attention on electricity grids could make them the “weak link” in the clean energy transition.
A new report published by TransitionZero has predicted that building grids could save nearly US$3 trillion in the net zero transition, and that reinforcing transmission lines within and between countries reduces the amount of costly generation and storage infrastructure needed. Transmission would also allow countries to export surplus power generated by clean energy to other countries, creating new export revenue streams.
Confidence in question
The Autumn Statement provided more detail on plans to increase allocations from UK pension funds into sustainable investments.
In July, nine UK defined contribution (DC) pension schemes pledged to invest 5% of their assets in unlisted equities – a move which could boost allocations to green and impact investments – as part of the Mansion House Reforms.
Yesterday, Hunt confirmed his intention to carry the proposed reforms forward, pledging £320 million to drive innovation and unlock the first tranche of investment through investment vehicles tailored to the needs of pension schemes.
The Chancellor previously claimed the changes could release up to £75 billion of additional investment.
“Investors need the confidence that they will earn a sufficient return on their investment, and that it will not be undermined by sudden and unpredictable shifts in policy,” said Serin from GRI LSE.
“Making most of the Mansion House reforms will come down to restoring that confidence.”
The government will also introduce a Growth Fund within the British Business Bank (BBB) to complement private investment vehicles, which has been welcomed by eight pension schemes, including Phoenix, Aviva and Universities Superannuation Scheme (USS).
“There is capital there to invest in new growth industries and climate solutions and technologies, but there needs to be an availability of investable projects that have long-term sustainable financial returns while helping investors meet their climate objectives,” said Warwick Thompson.
Earlier this month, pensions, savings and insurance provider Phoenix Group outlined seven strategies to bolster UK pension capital flows into climate solutions.
“The Autumn Statement’s tinkering around the edges on net zero support will not have repaired investor confidence after months of government backsliding on climate policies,” said Serin.
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