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Policy risk is traditionally associated with emerging markets: an unstable government that might hit investors with unexpected regulations that change the value of their holdings overnight. Now, sustainable investors in the UK are having to grapple with a similar problem.
Last month, prime minister Rishi Sunak said he was watering down the country’s plans to reach net zero by 2050 — including delaying a ban on the sale of petrol and diesel vehicles to 2035 — in a move that drew swift criticism from manufacturing groups.
Investors tell me they are also unimpressed. Many think that net zero targets for different industries are vital to plan an orderly transition to net zero in their own portfolios. Some say they are increasingly focusing on certainty on government policy when deciding where to put their money — with many warning they are now more likely to look outside the UK, where there is more policy reliability, such as the US after the Inflation Reduction Act and the EU with its Green Deal.
For Mike Fox, a sustainable investment veteran at Royal London, political uncertainty is already affecting his decision about whether to invest more in current energy stocks, including London-listed SSE, a big offshore wind developer. The price has fallen, but he is no longer convinced it makes sense to add to his holding. “Words have consequences,” he says.
The risk for large and broader sustainable funds including the ones he manages, he says, is that they could easily pivot into other areas such as healthcare or digitisation — generative artificial intelligence, for example, has applications in sustainability, while obesity drugs can have a positive impact on society — and ignore renewables altogether, if the political risk is deemed too high.
Specialist investors are also concerned. Jonathan Maxwell, chief executive of investment firm Sustainable Development Capital, says: “Our version of stock selection is usually project selection. Targets and goals stimulate new projects. Rolling them back reduces the attractiveness of projects and can even kill them. We prefer the clarity associated with the US Inflation Reduction Act and the European Commission’s policy of ‘Energy Efficiency First’.”
There are other worrying signs for renewable investors in the UK beyond Sunak’s announcement. Some point to a failed auction last month for offshore wind, which attracted no bidders because the government set a key price too low for it to be profitable, despite warnings from industry, insiders say.
Chris Tanner, a manager of JLEN Environmental Assets, an investment trust, argues that this as well as Sunak’s comments “increase the risk that investors will view UK green energy infrastructure with more caution as they question the policy framework needed to make a reasonable return over 20-plus years”.
Some investors with a long history of operating in the UK shrug off the current political noise. Ian Simm, founder and chief executive of Impax, the sustainable specialist, says that while UK manufacturers are “quite rightly irritated” that the goalposts have been moved, the longer term direction of travel is more important. Switching some key medium term dates from 2030 to 2035 doesn’t make a huge difference in his multinational portfolio, as long as the 2050 net zero date still applies.
He points out that renewable technology is now cost competitive so doesn’t rely on regulatory help as much as it once did — though this doesn’t yet apply to other areas such as long-distance transport — shipping and planes — or industries such as cement.
Ross Grier at NextEnergy Capital, one of the largest owners and operators of solar panels in the UK, says they have established solar as a core part of the energy mix over the past decade rather than “a tree hugging thing” without the government necessarily providing full support. But he warns that “capital is transient”. “A wavering commitment to net zero will reduce the attractiveness of the UK renewables market compared to other spaces,” he says.
Of course, the US and the EU are not straightforward havens of safety for sustainable investors. The US has been grappling with a backlash against ESG investments, while Germany last month watered down a ban on fossil fuel boilers.
But many investors say that while their direct holdings haven’t been affected yet, the mood music from the government is unnerving. Ricardo Piñeiro, who heads up global infrastructure at Foresight Group, a big investor in battery storage in the UK, warns that such announcements can undermine the position of the UK as a leader in net zero policies. “Politicians shouldn’t assume that capital is committed to the UK,” he says. “There are other options.”
Some point to the likelihood of a change in government at the next election. Labour has said it will reinstate the 2030 ban for petrol and diesel vehicles and introduce new targets for local councils to roll out EV charging networks, claiming the automotive industry needs more certainty. Others worry about how much further it could go if the current government wins re-election. “What if they move the ICE ban back further, to 2040?” says one.
In fact, one point stressed by all the investors I spoke to was that they are constantly telling the government that they need clarity and certainty and they’re not getting it. A warning shot, for now, but one the government needs to take seriously.
Alice Ross is an FT contributor. Her book, “Investing to Save the Planet”, is published by Penguin Business. X: @aliceemross