This article first appeared in ESG Clarity.
We are entering a truly vital time for the UK economy. The period between February and April saw the deepest and most sudden economic downturn for at least three centuries, and every sector has felt the strain.
The pandemic has also thrown the fossil fuel industry into turmoil. This has emphasised the need to shift towards renewable forms of power generation, providing the energy industry with a once-in-a-lifetime opportunity to undergo a transformational change.
The UK’s transition to net zero will be largely driven by significant investment in renewable assets. It has been estimated more than £21tn of cumulative investment into renewable energy is required globally by 2050 to meet the Paris Agreement.
While the role of the private sector cannot be underplayed, UK policymakers will be vital in encouraging a sustainable recovery. Build Back Better and a ‘green recovery’ are phrases we’re hearing often from the UK Government, but there needs to be a clear and consistent regulatory framework to attract the capital required to support the investment that is needed.
Winds of change
For some time now, the oil industry has been impacted by a global price war. In normal circumstances, demand for cheap oil would help stabilise the market. However, the slowdown in economic activity has seen the oil trade dry up and forced oil majors such as Shell and BP to make substantial write-downs in the value of their assets.
The outlook for renewables is much more positive. Renewable infrastructure stocks and renewable-facing companies have been performing well during the volatile market conditions. The IEA has commented that renewable energy has so far been the energy source most resilient to lockdown measures.
When the pandemic first hit, many feared our climate ambitions would take a back-seat to our need to kickstart the economy, however, many of the factors that have driven investment into renewables over the last decade are now more pertinent than ever. This is especially true for institutional investors like pension funds.
Pension fund trustees are increasingly conscious of their members’ attitudes towards investment decisions, which have seen a huge increase in impact investment and a renewed push for sustainability.
Last year, Octopus conducted a survey of institutional investors from across the globe, representing $5.9tn in assets. Encouragingly, UK investors were found to be leading the way in their climate change considerations. Over the next decade, UK based investors plan to divest up to a quarter of portfolios from fossil fuels, while also investing up to 13.1% of their portfolios into renewable energy. It is clear renewable assets are now seen as a mainstream investment.
More than just returns
There is an economic, as well as an ethical argument, for a global power system supported by renewables. A report from EY has claimed a renewables-led recovery from Covid-19 will create almost three times as many jobs as a fossil-fuel-led recovery. With significant job losses elsewhere in the economy, this is too good an opportunity to miss.
Following years of policy development to incentivise investment, it’s clear the global investment community is ready to invest into renewable energy at scale. And with good reason: renewable electricity from solar and wind now costs less than electricity generated from gas and coal, and renewables can be easily implemented at a huge scale.
Despite this, there is still a perception among some investors that investing in climate change mitigation comes at the cost of returns. However, the growth we have seen for renewable infrastructure stocks during this crisis may convert the last of the sceptics.
Building the green economy
There has never been a better moment to rebuild our economy with renewable power generation right at the centre. The Chancellor has already taken steps in the right direction, with his £3bn green investment package that could help support 140,000 green jobs.
Policymakers have a unique opportunity to incentivise more institutional investment in renewables. The Pension Schemes Bill has recently been scrutinised by the House of Lords. The Bill includes measures to allow funds to invest more into illiquid assets (i.e. those not listed on mainstream stock exchanges) that satisfy ESG criteria, while also requiring trustees to disclose information to their members on how they are considering ESG principles in their investment strategies. The Bill will now head back to the House of Commons and once passed, could have a transformative effect on UK renewable energy investment.
The UK has an opportunity to go above and beyond the ‘green recovery’ plans we have seen from economies around the world. As a global leader in renewable investment, and with next year’s rearranged COP26 on the horizon, the UK has a chance to shape policy in a way that will drive investment into a sector that will undoubtably have a defining role in our economy for generations to come.
Chris Hulatt is the co-founder of Octopus Group
For journalists in their professional capacity only. Issued by Octopus Group August 2020.