Industry experts have warned that the Prime Minister's net zero u-turn could create policy uncertainty and undermine investor confidence, although pension scheme trustees are not expected to make material changes at this point.

A number of UK asset owners, including a number of pension schemes, previously raised concerns that the government’s recent rhetoric could risk stopping the finance sector from making the investments needed to reach net zero and grow the economy.

These concerns have since been heightened, after Prime Minister, Rishi Sunak, announced a slow down on efforts to tackle climate change, confirming that while he still expects to meet the 2050 net-zero target, a number of key initiatives have been pushed back.

In particular, Sunak announced that the ban on new petrol and diesel cars would be pushed until 2035, and people would be given "far more time" to make the transition from gas boilers to heat pumps.

Reaction to the changes has been quick, as a cross-sector open letter to the Prime Minister raising concerns over the weakened net-zero policies received backing from over 400 organisations, including Brunel Pension Partnership, Border to Coast Pensions Partnership, and Make My Money Matter.

In particular, the letter argued that " sticking to long-term net zero policies is crucial to build business confidence and mobilise investment".

"Watering down these policies would damage the UK’s credibility as a good place for green investment, undermining British competitiveness. We are already losing investment to the US and EU, and rowing back would make it worse," it stated.

"We urge you not to weaken any net zero policies. If you do so, we believe this would be a historic mistake of your premiership, which could do lasting damage to the UK economy. Now is not the time to delay in the face of the greatest threat facing the world. Now is the time for action."

Adding to the letter, Brunel Pension Partnership chief investment officer, David Vickers, stressed that "any removal of green incentives or changes to approach create instability at a corporate level make it challenging to rely on government policy”.

Other pension schemes have also since echoed these concerns, as Universities Superannuation Scheme head of strategic equities, Innes McKeand, told Pensions Age that, "at a time when we want to see the real world change that’s necessary to limit the effects of the climate crisis, the government’s announcement creates policy uncertainty, which we believe is unhelpful for investment in the UK.

"It will potentially lock in emissions for longer," he continued. "Climate change presents a significant financial risk and we believe that a low carbon world will likely be a more financially stable world."

Aegon UK also raised concerns about the impact of the Prime Minister’s announcement of changes to environmental policies, warning that investors need stability and predictability on the UK’s net zero policies.

"Abrupt change risks damage to our and investor confidence in building a sustainable economy and supporting customer outcomes," it added.

"To support both investor and company climate action, we ask the UK to remain at the forefront of the global transition to net zero, committing to ambitious policies and not wavering in their implementation."

And this uncertainty could prove long term, as Zedra client director, Dan Richards, told Pensions Age that this latest development further undermines the investment landscape because it also decreases confidence in what will happen in the future.

"With the political opposition slated to reinstate these targets should they win the next general election, investors are left having to guess what government policy will be," he explained.

"Therefore investment decisions will be delayed until the dust settles, perhaps pushing back the time our country takes to reach net-zero by years and even decades."

Cartwright director of investment consulting, Sam Roberts, agreed, noting that "ironically, managing unnecessary uncertainty from regular changes in government policy wastes resources and energy."

And Roberts warned that, in addition to investor uncertainty, the recent shift in government policy could also present a future debate as to whether investing in government bonds is consistent with net zero.

“Governments tend to waste and misallocate resources through excess bureaucracy and decisions being based on politics rather than profit and loss (which requires an increasingly efficient use of scarce resources or a company goes out of business),” he stated.

“Also, by creating the boom bust cycle through the Bank of England’s support for fractional reserve banking, there is a significant waste of resources through that resource misallocation and the subsequent inevitable correction process.

"A possibly controversial emerging view may therefore be that, to hand on heart align with net zero, investors cannot invest in government bonds.”

Despite some industry concerns though, Roberts says that the changes should have limited impact on small and medium defined benefit pension schemes as many will be insured and wound up by 2035, and others will be running a low investment risk approach which would tend to include a significant allocation to UK government bonds or similar which are often assumed to have a neutral ESG impact.

In addition to this, he suggested that the delay in the target dates may help some sponsoring employers to manage the net zero transition better, thereby improving the security of members’ benefits.

Van Lanschot Kempen head of client solutions, Nikesh Patel, also argued that, while disappointing, particularly in relation to investors consideration of government debt, the changes are unlikely to slow the pace of corporate progress towards net zero, which had already run ahead of government policy in the UK and the world.

Adding to this, Independent Governance Group (IGG) head of investment and trustee director, Pavan Bhardwaj, suggested that "in the grand scheme of things, the scaling back of the government’s net-zero ambitions are unlikely to make a material difference for most trustees."

Bhardwaj stated: “There is now widespread acceptance among trustees that climate change leads to financially material consequences, and therefore trustees are obliged to adapt their investment strategies accordingly.

"The largest pension schemes have already set Task Force on Climate-related Financial Disclosures (TCFD) targets, so from the perspective of trustees, what happens in Westminster is likely to stay in Westminster and is unlikely to alter their approach."

Indeed, McKeand says that for the USS, one of the largest pension schemes in the UK, net-zero remains a key initiative despite the government announcement.

"As a long-term investor, our net-zero ambitions remain important to us, particularly our interim targets for 2025 and 2030, and we will continue to actively engage with the companies we invest in to drive positive change," he stated.

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