Investors and industry groups have slammed recent climate policy moves in the UK as sending the wrong signal to investors on the country’s ambitions as several major asset managers said weakening ambition on the environment has clouded their view of the UK’s green gilt programme.
On Monday, prime minister Rishi Sunak announced that the government would approve hundreds of new licences to drill for oil and gas in the North Sea, alongside investment in two carbon capture, utilisation and storage (CCUS) hubs.
The move follows a weakening of the UK emissions trading system this month and has exacerbated fears that the government could be about to weaken a planned phase-out of non-electric vehicles.
Monday’s announcements were condemned by investors and industry groups.
James Alexander, CEO of UKSIF, said that the announcement sends “entirely the wrong signals to investors on the credibility of the UK’s plans to reduce carbon emissions”. He added that policymakers should rebuild investor confidence by demonstrating a commitment to deliver a sustainable future.
Nick Molho, head of climate policy at Aviva Investors, said on LinkedIn that the move to approve new licences sent an “unhelpful” policy signal to investors on the UK’s net-zero transition, especially at a time when few policies are being put forward on the energy efficiency and sustainability side outside of carbon capture.
The government’s priority focus should be on decarbonising the power sector, reducing housing emissions and supporting electrification of transport and heavy industry, he said.
The emphasis on carbon capture was also a red flag for some investors. A spokesperson for AXA Investment Managers said the firm had steered clear of the UK’s two green gilts in 2021 because the green finance framework included CCUS.
“A sovereign green bond programme can reflect the levers that [the government] is using to decarbonise the economy,” they said. “It is disappointing to see UK policies place an emphasis on the role of CCUS technologies which, in our general view, should not distract from the need to reduce reliance on fossil fuels.”
Other investors are also souring on the UK’s green gilt programme.
John Ploeg, co-head of ESG research at PGIM Fixed Income, said he would take a more sceptical view of the green gilt programme as environmental ambition is rolled back in the UK.
“The benefit of a green bond is considered by most to be that it is supporting its issuer’s plans to transition, but this benefit is only as good as those transition plans,” he said. “Therefore, as an issuer’s transition plans lose credibility, so too should its green bonds.
“I believe this is particularly true for sovereigns, where the case for green bonds is often especially weak.”
Ploeg noted that the £16 billion raised from green gilts in 2021 and 2022 is a small proportion of the government’s overall budget and compares with £11 billion spent on fossil fuel subsidies in 2021 alone.
One major gilt buyer has already downgraded green gilts against its impact framework.
In December, Insight Investment stripped the bonds of their “dark green” rating due to delays in UK green policy and the approval of a coking coal mine. The programme is now classed as “light green” on Insight’s traffic light system.
The manager is one of the UK’s major providers of liability-driven investment strategies and the largest asset class in its £671 billion portfolio is sovereign debt, predominantly gilts.
It rates ESG-labelled bonds against a three-tier system, with issuances receiving either a dark or light green rating, or a red rating which results in exclusion from Insight’s sustainable funds.
The decision to downgrade the green gilt rating was made in December last year, due to a mix of concerns over wider government policy as well as green gilt reporting and allocation of proceeds.
“A number of other key policy delays coupled with ongoing challenges to the UK government’s net-zero policy have led to concerns around policy implementation,” David McNeil, head of responsible investment research at Insight, told Responsible Investor.
Areas of concern include delays to the UK green taxonomy and lack of detail on plans for decarbonisation of residential and commercial buildings, which McNeil described as “a large and growing share of UK emissions and longer-term contributor to stranded-asset risk”.
The most forthright comment on the UK’s climate policy backsliding, however, came from within the governing party.
Chris Skidmore, a Conservative MP commissioned to carry out a review of the UK’s net-zero ambitions last year, warned this month that the country’s position as an international climate leader was at stake, and that slowing progress may result in other countries also backtracking.
“The entire Paris Agreement, I think, does rest on the UK maintaining the pace of change, the pace of progress that it’s committed to so far,” he said.
Responding to Monday’s announcement of new oil and gas licences, Skidmore commented on Twitter: “This is the wrong decision at precisely the wrong time, when the rest of the world is experiencing record heatwaves. It is on the wrong side of a future economy that will be founded on renewable and clean industries and not fossil fuels.”
Noting that the decision had been taken while MPs were on recess, Skidmore added that he would call for an emergency debate once parliament is in session.