Green finance and climate change pledges - a greenprint for investment portfolios

The UK has just welcomed new leadership which has outlined a range of green policy pledges to tackle these broad, and increasingly pressing, issues.

We continue to witness record temperature rises as June 2024 was the 13^th consecutive month of global averages exceeding previous recordings. This is a stark reminder that climate change impacts could be coming much quicker than investors think and could rapidly rise up the agenda for country leaders.

In this article we aim to delve into the potential impact of these pledges and what that could mean for UK citizens and investors alike.

What is the Labour Government’s stance?

Broadly, Labour’s pledges underscore their commitment to economic growth while prioritising environmental sustainability. First, and most importantly, Labour has reiterated its commitment to maintain the UK’s 2050 net-zero target. To achieve this, they have outlined their intent to fully decarbonise the electricity grid by 2030.

The government’s support for this vision will be realised with support for nuclear projects, both large and small scale, alongside an expansion of offshore wind. They wish to quadruple offshore wind capacity, treble solar capacity, and double onshore wind capacity – and after only a few days in office the party has already overturned a decade long onshore wind power ban to the delight of the renewables industry.

It is certainly also worth monitoring its pledge of £8.3bn in funds to establish Great British Energy (GB Energy), the newly created public energy generation body. The government wants to use GB Energy to support renewable energies and aims to fund it in part through an enhanced windfall tax on North Sea oil and gas operators (78% tax rate, up from 75%).

While we are monitoring these pledges, we recognise things are already accelerating. In this week’s King’s Speech, more than 30 bills were noted to the House of Lords. Of these 30, one related to an Energy Independence Bill which will put in motion the pledges mentioned within this article as other pledges such as speeding up lengthy planning connections processes.

We also recognise that public support for renewable energy provision continues to be broad. In a recent survey, 58% of those asked would prioritise expanding UK supplies of renewable energy, over 25% who would prioritise drilling for more oil and gas. We therefore remain committed to our energy transition theme.

It would be sensible to expect these policies to drive sustainable energy production and thus we should continue to assess companies based on their sustainability efforts, as well as their contributions to net-zero goals and renewable energy capacity targets. There could also be adverse impacts on businesses not currently prepared for the new green regime so ensuring portfolios with long-term horizons are diversified will be key.

But energy production is only part of the problem

Now, despite the pledges around decarbonisation and electrification, one of the largest criticisms related to “greenifying” the grid has been related to the challenges around energy storage and grid upgrades. While Labour hasn’t explicitly outlined targets to scale energy storage, they have made multiple references to ensuring there is suitable long-term energy storage and have also recognised that the grid needs to be upgraded.

This is one of the largest challenges facing the incoming government and to tackle this, Labour has pledged to create a new National Infrastructure and Services Transformation Authority. What we can hope here is the support of energy storage businesses alongside backing research and development. This is needed to mitigate intermittency issues (periods when wind and/or solar can’t provide enough energy) as well as covering any supply shortages during high demand periods.

The government wants to target the efficient use of energy, too

The government has made it clear that scaling priority low-carbon industries will be one of their key economic growth drivers. Having been in office for several days, we have already witnessed the launch of a £7.3bn National Wealth Fund (NWF) which aims to ensure investments can start being made rapidly. This could drive economic growth by creating higher value jobs while seeking to reduce emissions.

It has pledged to undertake a modern industrial strategy by funding steelmaking (£2.5bn), Gigafactories that produce electric vehicle batteries (£1.5bn), and port decarbonisation (£1.8bn). This also included £1bn for carbon capture and £500m for green hydrogen.

Government support for these industries may make them appear more attractive and investors could see marked demand for companies that are sustainable leaders within these industries.

In terms of pledged research and development, the party has committed to ending short funding cycles with a focus on longer-term commitments which should help address the challenges facing industries that would find it difficult to lower their greenhouse gas emissions.

While there has been a huge focus on the manufacturing and power industries, Labour has also outlined that it wants to ensure the Bank of England considers climate change as part of its mandate. Consequently the new government has said it will require UK regulated financial institutions to “develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”.

The importance of ensuring businesses in the financial sector are taking their transition responsibilities seriously is therefore key as investors. How the landscape evolves over the coming years will be crucial to long-term business viability.

The government has a broader green commitment

Outside of these more economic-oriented policies the new government has also pledged green social policies. We can often find that the E (Environmental factor) under ESG can be in direct opposition to the S (Social factor).

So being mindful of a just transition, rather than an environmental transition alone, can be one of the key pillars to its success.

The new government’s focus on ‘cleaning up’ the water companies, reforming and promoting public transport, as well as restoring woodlands, forests, wetlands, and peat bogs, highlights their acknowledgment of the wider ecosystem UK citizens operate within. While all of these may not be directly investible opportunities, they can support the trajectory of investible opportunities which we have the prospect of capturing.

It will require bringing all individuals, communities, and companies on the journey of climate change mitigation to ensure the longevity of our wealth. The promises laid out by the new government are adventurous, but well needed.

How Charles Stanley can help clients take advantage

Our investment managers create bespoke portfolios around each client’s goals, objectives and investment preferences. If you’re interested in finding out more, request a call back from our team.

Prefer to manage your own investments and looking for responsible investing ideas? The Charles Stanley Preferred Fundlist is curated by the Charles Stanley Collectives Research Team and includes the ability to filter for funds that have responsible investing as an objective. You should check a fund’s literature, including Key Investor Information Document and prospectus, to understand the objectives, scope and risk of a fund before investing.

Please remember this a long-term theme subject to false-starts and changes of emphasis as the UK – and indeed the world – discovers new technologies and techniques on the road to net zero. This means individual opportunities can, and will, be subject to short- and medium-term volatility. All investments should be considered as part of a diversified portfolio.