ESG industry on economy chaos and party conferences: ‘Not a fun time for fund management’

Reflections on policy areas thrown into uncertainty including climate, biodiversity, obesity and energy


Christine Dawson

Sustainable investing and broader green and social issues have been victims of turbocharged political and economic developments in the UK over the last month, industry experts have told ESG Clarity.

While rumours circulate of more U-turns on the recent mini-budget, three fund management professionals – Kate Elliot, head of ESI research, Rathbone Greenbank Investments; Gemma Woodward, head of responsible investment at Quilter Cheviot; and Ketan Patel (pictured), fund manager, EdenTree Responsible and Sustainable UK Equity Fund – shared their takes on the political party conferences and policy announcements – and the U-turns – we have seen since prime minister Liz Truss formed a new government in September.

What have you taken to be the direction of the government on the green economy?

Woodward: Now that the main party conferences are over the immediate phrase that springs to mind is “actions speak louder than words”. While there have been lots of good messages written into speeches, ultimately there has been a policy shift on fracking and Jacob Rees-Mogg, who has been quoted as saying “climate alarmism”, is now responsible for UK energy.

This is not necessarily the actions of a government that will be leading on ensuring positive green outcomes.

Similarly, the prime minister’s targeting of the anti-growth coalition during her keynote speech may also point to a decision to prioritise growth over nearly everything else.

What has the recent political and economic turmoil looked like from an investment perspective?

Patel: From a UK investment perspective, the policies that have been announced and U-turns haven’t been helpful at all – it just creates a huge amount of volatility.

And… volatility [itself] is not helpful, especially in a part of the market where it’s the renewable trusts which are generally seen as stable defensive, high, yield, quality, etc. Those were down between 5-10% in one day on the back of the government’s announcements.

And there’s no clear granularity. It’s very much “we’re going to introduce a cap [on renewable energy revenues]”, but they’ve got nothing beyond that. So again, from an investment perspective, this just creates uncertainty.

We have a government here that’s telling farmers they should grow food and not have solar on their on their land… Fracking was banned for a long, long time and suddenly now it’s: “You can get on, frac away.” And there’s been no consultation with communities which will be affected. So, there are a lot of things in terms of politics at the moment that are just whipsawing markets.

And how is it affecting your role as fund manager in particular?

Patel: There is a great opportunity, trillions have to be spent to make sure, not just in the UK but around the world, we have a much greener source of energy in terms of connectivity and all those things so it’s still a great place to invest. But in the near term, the headwinds are particularly tough. We’re a long-term investor – we just have to get through the noise really.

We’ll have another election coming up in 18 months, there’ll be more political uncertainty as well. We see the conflict in Ukraine is carrying on, Covid-19 hasn’t gone away, we’ve got issues in China, as well. It’s going to be a very interesting Q4 and I’m not even talking about the cost-of-living crisis as well. There have been more fun times to be a fund manager. Anyone who tells you it’s fun – it’s not. It’s tough watching really high-quality businesses just falling, collapsing virtually, in terms of earnings margins, share prices.

Were there any standout points on social issues from the party conferences?

Elliot: We were disappointed to see Liz Truss strongly hint in her conference speech she would be dropping the government’s obesity strategy stating: “I’m not interested in how many two-for-one offers you buy at the supermarket.” Rising rates of obesity represent a significant social and economic cost for the UK, which the government has consistently failed to address.

Using the cost-of-living crisis as a reason is short term in nature, as any inaction will ultimately hit the poorest in society hardest with research showing a clear correlation between poverty and obesity in the UK. Investor engagement with companies has also shown they too are overwhelmingly in support of regulatory measures, which bring greater consistency and create a level playing field for the sector. The Investor Coalition on UK Food Policy will be engaging closely with the UK government in the coming days and months to push for the level of ambition to be kept intact and further expanded.

Did you see any notable announcements linked to biodiversity?

Elliot: Both the Labour and Conservative party conferences contained plans to boost housebuilding, invest in critical infrastructure and reform the planning system to remove unnecessary blockers. However, changes to planning rules must not come at the cost of irreversible damage to the UK’s ecosystems and biodiversity. Only last year, the UK government committed to delivering a “nature-positive future”, with infrastructure projects required to be net positive on biodiversity. These commitments should not be forgotten as planning rules relax and environmental responsibilities are at risk of being side-lined. 

While the messaging from the Labour party conference put great prominence on environmental considerations, with the conference slogan being “fairer, greener future”, neither party clearly outlined how they would protect and preserve biodiversity as they seek to revitalise the UK economy.

Has the Labour party inspired any confidence?

Woodward: Labour’s Green New Deal is at the heart of their election manifesto produced in 2019, but it is much easier to come up with policy when not in government. And much was said at the conference about a new nationalised energy company, which would have more of a focus on creating green energy. While in theory this could lead to good green outcomes, it’s much easier to say it will than actually deliver them.

Patel: Again [with Labour] there’s a lack of granularity. It’s all well saying “we want a green revolution” but actually, how are you going to finance it? What is the return on capital invested? This is not going to be free, is it? How you’re going to sustain it? Is the customer going to get a payback?

Any thoughts on how the government can make progress on climate?

Woodward: Obviously, with a cost-of-living crisis now in full swing we need policies that aim to help the environment, but do not make energy more expensive than it already is or lead to energy scarcity. This is a difficult tightrope to walk for any government.

However, we need a government that takes more of a lead on the climate through global leadership and better regulation at home and not just leave it to the private sector. This needs to happen across the world though as at present the default view in many nations is simply to leave it to private companies.

Elliot: While government intervention on energy bills is essential, the necessary transition to net zero must still be a priority. Commitments on energy efficiency – a key element of both energy security and progress on decarbonisation – varied between the Labour and Conservative party conferences. Labour announced it would invest £60bn over 10 years to insulate 19 million homes, while energy efficiency was conspicuous in its absence from business secretary Jacob Rees-Moggs’ speech.

Delayed action on decarbonisation makes a disorderly transition more likely, which in turn increases risk on many fronts. These include extreme weather events, rapid policy interventions, stranded assets, higher transition costs for businesses and exacerbated social risks as high-carbon industries become less viable.

What would you have liked to have seen from the party conferences that you didn’t?

Patel: A clear roadmap on how they would meet the energy requirements of the UK from not just over relying on oil and gas or nuclear or coal, but actually planning on the renewable journey. Storage will be a big issue. A greener grid, in particular, would have been something.

These things are not pie in the sky, other countries are doing it.

It was a lost opportunity, certainly for the current prime minister to say that we’re no longer going to be held hostage to foreign powers when it comes to energy.

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