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Investors alarmed at UK net zero policy uncertainty

Author: ICAEW Insights

Published: 13 Sep 2023

The tone of recent policy announcements risks undermining progress of investment in green businesses and innovations, says the UK SIF open letter to Prime Minister.

Some 36 financial institutions with £1.5trn in assets under management have written to UK Prime Minister Rishi Sunak with concerns about the government’s approach to net zero – warning that critical momentum for funding innovative, green businesses could be ebbing away amid policy confusion.

Issued under the banner of the UK Sustainable Investment and Finance Association (UK SIF), comprised of such prominent firms as HSBC, ABN AMRO and Aviva Investors, the open letter says that recent policy signals risk undermining the UK’s leadership in the “clarity, certainty, and confidence of policymaking” towards meeting the nation’s net zero goals. 

Indeed, the letter notes, the government’s apparent policy shift “blurs regulatory visibility for investors” and risks the finance sector’s ability to make the “large-scale, transformative investments required to accelerate net zero delivery and unlock growth in the UK”.

Unclear commitment

Recent public debates, the letter continues, have cast doubt on the UK’s planned 2030 phase-out of new petrol and diesel cars and 2035 phase-out of gas boilers.

Meanwhile, reforms to UK carbon markets, hints that new energy efficiency standards for rented properties could be delayed and controversial plans to issue licences for further oil and gas extraction in the North Sea have all cast uncertainty on the government’s commitment to its own near- and longer-term climate targets.

“As investors and financial institutions,” the letter notes, “we need confidence in the government’s long-term commitment to this agenda to allow us and our investee companies to make multi billion-pound investments in the UK’s sustainable economy of the future.”

In the investors’ view, the UK “could and should lead the world” in sustainable finance – driving capital towards innovative British companies and creating jobs and skills across the country. “As the chancellor set out in his [10 July] Mansion House speech,” they point out, “the UK must strive to be the best place to start, grow and scale new enterprise, including in cleantech, and leadership in sustainable finance can ensure we have the capital needed to make this a reality.”

Growth industry

To mitigate the current lack of clarity and encourage the flow of capital, the investors stress, the government must provide long-term policy certainty. They seek assurances that crucial policy pillars for driving investment, such as predictable carbon pricing mechanisms, the transition to zero-emissions vehicles and improved energy efficiency standards for the rented sector and across the UK’s housing stock, will not be “changed abruptly”.

“This is essential so that our sector can help drive capital towards innovative British companies and infrastructure and deliver prosperity across the UK, improving productivity, pay and creating 1.7 million ‘green collar’ jobs.”

The letter highlights the fact that sustainable finance is a major growth industry in the UK, building on the UK’s position as the world’s largest net exporter of financial services. Consistent policy can help to position the UK financial services sector as a global leader in green investment.

“The global competition to capture billions of pounds of private investment in the clean industries of the future is intense,” UK SIF Chief Executive James Alexander says. “Ministers’ recent remarks are undermining investor confidence and putting the UK’s net zero head start at risk. The major financial players are deciding where to invest, and the UK needs to look both attractive and consistent as a leading destination for sustainable investment.”

Pivotal role

For ICAEW Financial Services Regulatory Manager Polly Tsang, the increased frequency of wildfires, droughts and flooding across the world demonstrates that extreme weather from climate change poses real, systemic challenges to the financial system. As such, it is important for governments to establish coherent net zero goals.

“To achieve net zero emissions, it is imperative to foster a symbiotic partnership between governments and businesses. In step with the pivotal role that governments play in establishing robust regulatory frameworks and policies, businesses must embrace innovation and commit to transitioning towards sustainability.”

Tsang points out that the accounting profession has already made significant strides in this arena through initiatives such as the recommendations of the Task Force on Climate-related Financial Disclosures and the introduction of the IFRS S1 and S2 sustainability standards. “Those measures are instrumental in fostering transparency in sustainability reporting: a critical component that encourages firms to track, and be held accountable for, their net zero journeys. However, it is crucial to acknowledge that businesses’ ability to realise their net zero goals hinges on government support.”

To provide meaningful support, Tsang stresses, governments should offer a stable and predictable regulatory timeline, ensuring that businesses have the necessary framework with which to plan and implement their sustainability strategies effectively. “Additionally, government intervention, in terms of investments in the social and technological advancements required to decarbonise the economy, underpins the success of the global transition to net zero.”

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