Tackling climate change is often presented as a complex challenge, and in many respects that's true. Inevitably transforming our energy systems and economy away from fossil fuels is a complicated endeavour.
But in other ways, the net zero transition is straightforward. At its heart, decarbonising at the rate required to limit global heating is a challenge of delivering investment across multiple sectors, and – if we are to cut emissions in line with what the science requires and national governments have committed to – doing so at a vastly quicker rate than we've achieved so far.
In short: we need to build a lot of stuff, and quickly.
This is not a novel statement. The International Energy Agency's net zero scenario estimates a clean energy investment requirement of over US$4 trillion per annum by 2030. The UK government has clearly set out the need for investment in technologies including renewables, nuclear, carbon capture, utilisation and storage (CCUS), hydrogen, networks, energy efficiency, and heat pumps.
Similarly, our pensions investments are in some respects complex but in others are simple: we are invested in businesses and assets which deliver economic activity. That means the pensions and insurance sector can play a central role in the net zero transition. The Association of British Insurers estimates £2.7 trillion of investment is needed by 2035 from the public and private sectors to put the UK on track to meet its net zero goals. The pensions and insurance sector could provide one third of that capital.
But while the investment need is clear, the delivery mechanisms are not. Government and regulators now have – through the Net Zero Review, and a new Net Zero Strategy to be published next year – the opportunity to introduce policy and regulatory frameworks to deliver the investment we need.
Failing to do so means missing our climate targets – and it means missing investment opportunities in sectors which could deliver major economic benefits and nationwide growth.
The need for speed
The UK has shown real leadership on climate change – decarbonising faster than any other country in the G7 since 1990. More recently, it has led in setting emission reduction targets commensurate with the urgency of tackling climate change in the next ten years.
But while progress to date has been strong, there is a big gap between the UK's carbon targets, and what we're on track to achieve. The challenge of the next decade is different to that of the last. The majority of our recent decarbonisation came through the replacement of fossil fuels with renewables in the power sector. However, in the next decade investment needs to be scaled up and replicated across all other sectors of the economy – transport, buildings, industrial production and more.
Targets are helpful, but they won't deliver change at the pace required. As Lord Deben, Chair of the Climate Change Committee, has said: “The UK is a champion in setting new climate goals, now we must be world-beaters in delivering them.”
When we look globally, action is accelerating fast. The US' Inflation Reduction Act allocated around $370bn to clean energy, and may deliver much more; China will be investing £0.6 trillion per year in clean energy by 2030; and the EU has launched a euro300billion plan, REPowerEU.
This international momentum creates big opportunities for the UK, which has a competitive advantage in key low-carbon growth technologies including batteries, carbon capture and storage, zero carbon building materials, offshore wind and advanced data technologies. The supply of goods and services to enable the global net-zero transition could be worth £1 trillion to UK businesses by 2030 and deliver 1.7 million new jobs.
And our opportunity is not limited to the development and delivery of new technologies – we can also be leaders in providing the finance for them. London is the global leader in sustainable finance due to the quality and depth of its offerings. The Government intends for the UK to retain its place as a sustainable finance market leader, not least as the global market size for low carbon financial services could reach £280billion per year in 2030 and £460 billion in 2050.
Finance needs to flow to innovation and new technology diffusion, to incentivise business models and behaviour change now. Our industry forum, the ABI, has estimated we need £0.3trn for commercially unproven innovative technologies, £1.5trn for key infrastructure in electricity, transportation, and manufacturing; and a further £0.9trn to support reduction in energy consumption in the UK by 2050.
From targets to delivery
The investment opportunity is huge. However, the UK's performance has stumbled. The Climate Change Committee found “major failures in delivery programmes”. Continued policy uncertainty hinders investment and delays technological progress, all the while eroding the UK's competitive advantages in the future global economy and increasing the risks of disruption and dislocation from the low-carbon transition.
The government is legally required to publish a new Net Zero Strategy by March 2023, and has commissioned a Net Zero Review to inform that strategy. That provides a huge opportunity to provide the clarity and business models investors need.
The Strategy should provide clear transition pathways for key carbon-intensive sectors, such as transport, industry, buildings and agriculture to reach net zero by 2050. It needs to give an assessment of the investment gap for these sectors, and – crucially – effective, clear and supportive policy and investment frameworks, that include public investment, designed with market participants. The combination of policy, incentives and collaboration that supported the development of offshore wind provides an instructive model. These measures could increase the supply of projects, reduce complexity and enhance the financial attractiveness of investments to enable institutional investors such as Phoenix to finance the low-carbon transition.
There are further regulatory measures specific to pensions that need addressing. UK pensions allocate only 7% of their assets to alternatives – such property, private equity and infrastructure, whereas the average amongst the countries with the largest pension markets, the ‘P7' is 19%.
Asset Allocation, Pension Funds
A Phoenix-sponsored Policy Exchange report, Unleashing Capital, sets out the case for and recommendations to support greater flexibility for pension schemes to invest in illiquid assets, such as green infrastructure and real estate, to the degree seen in other countries.
The way forward
With £0.3 trillion of assets under administration and long-term time horizons we at Phoenix Group can provide capital to businesses at every stage of their life-cycle. Our £100 million Venture Capital Fund targets early-stage green energy and fintech businesses to support ecosystem innovation. In 2021, we invested around £1.3 billion directly in sustainable assets. Looking ahead, if the market and regulatory conditions allow, we intend to make £10 billion of direct investments in sustainable opportunities supporting the key themes of green investment and ‘levelling up'. In our £160 billion listed portfolio we are embedding a comprehensive approach of investment, stewardship and engagement through industry bodies to foster system change.
As the UK's COP Presidency ends, it should now reaffirm its role as a global climate leader and demonstrate its ambition to be the world's first net-zero finance centre.
Businesses and investors recognise the urgency of the challenge. To fully unlock private investment capacity, business and finance leaders have called on Government to provide consistent and certain policy coupled with the right long-term public sector investment.
Through the Net Zero Strategy, HM Government must respond with clarity and certainty in detailed transition pathways for sectors across the economy across public spending, policy, and regulation.
Then we can direct investment towards the sustainable economic activities that drive inclusive growth tackling the environmental and costs of living crises.
The ‘P7' is comprised of Australia, Canada, Japan, Netherlands, Switzerland, UK, US
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