Industry bosses have warned sustainability efforts may be stalled as a result of the ongoing energy crisis and delays to critical financial reforms.
New reforms that would require financial advisers to ask clients about environmental, social and governance preferences were due to be brought in last year but have been delayed indefinitely.
The Financial Conduct Authority scoped the market in November on proposals to classify related investment products following the introduction of European regulation around sustainable finance disclosures.
One retail investment product manager told Proactive that the FCA’s mooted disclosure reforms on home turf would help sustainability, an often marginalised but increasing focus for institutional investors, to “gather pace”.
During an interview with Proactive, corporate broker finncap Group PLC (AIM:FCAP)’s former chief executive Sam Smith said it was “worrying” that ESG had taken a “backseat” amid rising energy prices.
In a dramatic U-turn from the government’s pledge to phase out coal by 2024, business secretary Kwasi Kwarteng began negotiations to bring up to five coal plants out of decommissioning to help keep the lights on this winter.
Liz Truss, who is vying for the Conservative leadership, has also said she would suspend the green levy on energy bills if she became prime minister to help households afford unprecedented charges.
This is as fears grow that the UK will experience blackouts this winter following sanctions on Russian oil and gas, and restrictions on the Nord Sea 1 gas pipeline, in addition to gloomy predictions from Cornwall Insight that annual energy bills will rise above £4,000 next year.
There are already early warning signs that the energy crisis is forcing investors and portfolio managers to re-evaluate ESG priorities.
The crisis has “introduced an important and overdue debate about bundled ESG scores and rigid exclusionary lists”, Patrick Wood Uribe, chief executive of financial data firm Util, told Proactive.
“Complexity and change are hallmarks of a sophisticated industry, not the undoing of one,” he added, emphasising that “unexpected developments” and case-by-case decisions are part and parcel of the nature of markets and investing.
In Wood Uribe’s view though, “the energy crisis hasn’t derailed sustainable investing” altogether.
According to Morningstar data, global sustainable funds attracted US$32.6bn of new net capital in the second quarter, a 62% drop from US$87bn of inflows during the previous three months.
However, sustainable funds “still held up better than the broader market”, according to Morningstar’s Global Sustainable Fund Flows: Q2 2022 in Review report.
Markets across the board have been rocked by concerns of a global recession, high inflation and rising interest rates.
‘Tradeoffs’
Deloitte estimates that climate inaction could cost the global economy US$178trn by 2070, and this summer’s record heatwave was early evidence of the devastation caused by climate change.
“Given the scale of necessary capital deployment, it’s not a challenge the investment industry can sit out,” Wood Uribe told Proactive. “It is, however, time to retire two features of ESG.”
As Tesla Inc (NASDAQ:TSLA)’s exclusion from the S&P 500 ESG Index earlier this year showed, combining environmental, social and governance into a “catchall category buries inevitable tradeoffs”, he said.
“Recent events are a stark reminder that accessible energy is a social imperative,” Wood Uribe added, noting that “companies can exploit those contradictions to appeal to investors”.
It is virtually impossible nowadays to find a company with an ‘absolute positive or negative impact’, he pointed out, given how connected global supply chains and industries are.
Renewable energy producers and manufacturers, for example, often rely on mining companies and “dubious supply chains” to source core components.
“Investors need to exercise discretion—politicians, flexibility—on the necessary but not-quite-straight road to net zero,” said Wood Uribe.
Wind turbine manufacturers have been hit particularly hard by post-Covid supply chain blockages.
Despite there being a case for needing more energy, amid a ‘profits bonanza’ in the oil sector that has benefited companies such as BP PLC (LSE:BP.), turbine makers such as listed manufacturer Vestas Wind Systems have suffered unexpected losses.
On Wednesday, Vestas posted a pre-tax loss of more than €1bn in the first half of this year, compared to a profit-making opening six months of 2021, according to its interim results.
Siemens Gamesa Renewable Energy, a rival listed turbine maker, meanwhile faces ‘internal challenges’ stemming from cultural clashes between its German and Spanish owners, according to Ben Nuttall, senior analyst for industrials at Third Bridge.
“The wind space continues to face huge supply chain challenges, which combined with a long lead time between prices and costs being set has caused havoc for margins,” he said in a statement on Wednesday.
“The war in Ukraine has been mixed for wind, because although it has accelerated policy discussion it has also exacerbated supply chain challenges, specialists we speak to see it being net positive from 2025 onwards.”
These factors could leave potential scope for Chinese players to enter the European turbine manufacturing market.