Low carbon transition – ESG Feature


Theresa May’s influence over politicians, investors and con- sumers will still be felt more than 30 years after her three-year reign as prime minister ended in failure. After struggling to deliver Brexit she quit Number 10 in 2019, yet the legacy she left behind in another area will shape life in the UK for decades to come.


One of the few laws May successfully passed through Parlia- ment during her leadership was designed to protect us from the greatest threat to humanity: climate change. High levels of carbon dioxide, or CO₂, in the atmosphere not only causes global temperatures to rise but increases the prev- alence of natural disasters. Indeed, the floods witnessed in Northern England earlier this year, bushfires in Australia as well as droughts and typhoons in the US are set to make regu- lar news headlines as rising levels of carbon in the atmosphere stops heat from the sun escaping back into space. Extreme weather events are not the only treat that burning fos- sil fuels causes. Land being swallowed by rising sea levels, dis- ruption to the food chain, a heightened risk of heat stroke and asthma-causing air quality are other consequences. To protect future generations May enshrined in law that by 2050 the UK must be a net zero producer of greenhouse gas emissions, of which CO₂ is the main culprit. An overnight ban on fossil fuels would mean that the world cannot function, so companies need to offset their harmful gas discharges by plant- ing trees or using carbon capture and storage technologies to match the levels of CO₂ they release. Climate change is today’s problem and while May should be applauded for making sure that the issue stays on the political agenda, the target she set to switch from a carbon-powered economy to a greener one in a little over 30 years is ambitious, according to many of the professional investors and consult- ants I have spoken to.


“In theory it is achievable; in practice it will be quite difficult,” says Ed Lees, senior portfolio manager, sustainability themat- ics at BNP Paribas Asset Management.


Hard target To achieve the 2050 emissions target, we need to change how we make and use energy. Protecting forests, not making single- use plastic and eating less meat are also high on the agenda, as is removing carbon from the atmosphere. Every area of society must become sustainable, from how we grow food and power our homes and businesses to how we travel from A to B and construct buildings. The problem is that we can’t just ditch fossil fuels until viable alternatives are per- fected and reach a suitable scale to feed the National Grid and fuel longer journeys for cars, trucks and buses. Yet cleaner forms of energy are gaining momentum. Renewa- ble sources of electricity powered by wind and the sun were the


largest contributor to the UK’s national grid in the third quar- ter of 2019, according to the latest available data (see chart below). This pushed fossil fuels to their lowest level on record, with oil and coal only contributing 1%. When the figures for nuclear are included, cleaner forms of energy accounted for al- most 60% of the electricity that powered Britain’s homes and businesses during those three months.


The UK’s energy mix (Q3, 2019) Others– 4%


Nuclear– 19% Gas –38%


Biomass – 12%


Solar – 6% Wind – 20% Source: Carbon Brief


“There is a changing of the guard when it comes to the energy system,” says Laura Sheehan, an oil and gas equity analyst at Newton Investment Management. So the UK has been quite successful in phasing out coal, but there is work to do in other areas of the economy. Replacing petrol and diesel engines with those powered by electricity and fuel cells is an example, but it is a shift that not only needs reg- ulation to make it happen, but government funding, too. “Green buses are a good start, but we need ongoing subsidies to help the consumer make that transition to electric vehicles, which involves an extra upfront cost,” Lees says. The government is aware that its role goes beyond just setting the target. In the first Budget since the low carbon goal became law, Chancellor Rishi Sunak unveiled policies designed to move the UK towards a low-carbon economy. To reduce air pollution Sunak cut the tax breaks on red diesel for industry vehicles, aside from those used in farming and on the railways. He also reduced the tax on renewable power, while increasing the duty on gas. Funding for research and development focused on cleaner forms of energy was doubled to £1bn.


While there is a great appetite from government to achieve the target, Jennifer O’Neill, an ESG and responsible investment consultant at Aon, points to a lack of a clear direction in how to get there. “Time is marching on. We have 30 years to reach it and the pathway is still being mapped out,” she says. Yet the government is working to guide the controllers of huge


Issue 92 | April 2020 | portfolio institutional | 27


Oil and coal – 1%


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44