The UK government, less than three years after setting out ambitious plans to achieve a target of net-zero carbon emissions by 20501, has announced significant changes to its approach2. We outline our view of the UK’s green debt issuance and the significance of two key policy shifts.
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In summary:
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Context for key shifts in UK net-zero policy
1. Delay to the ban on UK sales of new vehicles with combustion engines from 2030 to 2035
Electrification of passenger vehicles is essential to meeting the UK’s net-zero target. Reductions in emissions from the energy sector mean that transport is the largest sectoral contributor to UK emissions – in 2022, the transportation sector accounted for 34% of all UK territorial CO2 emissions, with more than half of this from road transport3. However, net emissions are largely unchanged from the early 1990s, despite improvements in vehicle fuel efficiency, as a result of population and traffic growth.
Manufacturers have already accelerated capital investment in line with the original 2030 target (with Ford committing £430m of investment in its UK manufacturing value chain4) which was seen as an important signal of intent to both industry and consumers; electric vehicles represented a fifth of new vehicle sales in 2022, an 80% increase from 20205.
We note that the Climate Change Committee, an independent body formed to advise the government on climate change, has previously estimated that a 2030 ban would be associated with over £6bn of cost savings for society versus a ban in 2035, largely as a result of avoided fuel costs6. The delayed ban will also have repercussions for the supply of second-hand electric vehicles, with around 80% of UK drivers purchasing used cars over new.
2. Delay to the ban on gas boilers in new homes from 2025 to 2035
Around a third of UK greenhouse gas emissions come from heating homes and buildings, a sector which has also failed to deliver meaningful emissions reductions in the past decade despite improvements in the energy sector. The UK’s residential building stock is generally recognised as the least energy-efficient in Europe, resulting in significantly higher energy consumption for heating and cooling.
This delay will therefore make achieving net zero by 2050 even more challenging. The government’s target of 600,000 heat pump installations a year by 2028 was already regarded as challenging given low uptake rates (with the UK having the lowest share per capita in Europe), and the 2025 target was seen as key to development of the domestic value chain and achieving economies of scale.
Part of the challenge in the UK is that an effective carbon price is applied to electricity consumption but not to domestic gas, which lowers the cost savings associated with heat pump installation. Energy market price reform is needed to incentivise wider uptake of heat pumps.
Impact on the environment for UK companies and the UK’s international competitiveness
In addition to the increased emissions associated with loosening these policy measures, we note that these signals raise questions about domestic low-carbon capital investment at a time when the US, EU and China are providing significant direct and indirect subsidies to investments in low-carbon technology and power generation.
Over time, this may have detrimental impacts on related investment in the UK – it continues a trend over the past decade of unstable energy policy, which half of UK companies responding to KMPG’s Energy Transition Survey in 2022 identified as a barrier to low-carbon transition7.
Insight’s view on green gilts
In December 2022, Insight downgraded green gilts from our highest dark green rating, indicating a best-in-class green bond, to a light green rating, which indicates that green gilts are not best-in-class but remain acceptable for our Responsible Horizons and other strategies with sustainability objectives.
This downgrade reflected our judgement that while green gilts bear many positive sustainability characteristics, recent developments meant we no longer considered them best-in-class. We believe the rating already reflects the deterioration of UK climate policy implementation.
You can read our paper, focusing on the UK’s progress to net zero and impact bond rating for green gilts, here.
Our impact bond ratings reflect our view of the green gilt framework from a sustainability perspective and are not a judgement of the financial characteristics of green gilts. These ratings have no direct implications for investment management unless portfolio guidelines or other specific parameters have been set in place.
The latest announcements, in our view, are consistent with previous deterioration in the UK’s climate policy implementation, and so our assessment remains unchanged. We note that clean transportation was a major allocation of the UK green gilts; but we also are aware that the ban on electric vehicle sales brings the UK into line with other jurisdictions such as the EU. Our light green rating for green gilts therefore remains in place. We will continue to monitor and assess the situation.
