The Financial Conduct Authority will regulate companies providing environmental, social and governance ratings to users in the UK, under plans set out in chancellor Jeremy Hunt’s Spring Budget.
ESG ratings provision has come under scrutiny in the UK and overseas in recent years. In 2023, the FCA endorsed a voluntary code of conduct for providers designed by the International Capital Market Association and the International Regulatory Strategy Group. The EU, meanwhile, adopted plans to regulate ESG ratings providers in December.
The UK government consulted last year on regulating ESG rating providers. In the consultation paper, market participants raised concerns about ESG ratings in relation to providers’ methodologies and objectives, suggesting they can be “be opaque and lead to confusion about what a rating implies”. On March 6, the Treasury said a consultation response and legislative timeline would follow the Budget announcement later this year.
“The holding statement from government [on its website] is somewhat disappointing given that the consultation closed last summer,” said law firm Ashurst partner Lorraine Johnston. “Today’s announcement will come as no surprise; the consultation on the future regulatory regime for ESG rating providers only pointed in one direction.
“Industry is looking for clarification around what constitutes an ESG rating and who will be in scope in providing those,” Johnston said, adding that “exclusions or exemptions will be key in this determination”.
Sondre Myge, head of ESG at asset manager Skagen Funds, described the government’s plan to regulate ESG rating providers as “an important and necessary initiative”.
“There is too much ambiguity around ESG data and ESG scores — within and across third-party ESG vendors,” he said. “Moreover, there are obvious conflicts of interest. As investors, we need to be able to rely on ESG rating agencies providing a fair and balanced coverage of companies.
“Sadly, our feedback from our investees is that third-party agencies are convoluted, hesitant to listen to input and provide feedback, inaccurate in framing of sensitive topics like controversies, and misattributing supposed risk exposures,” said Myge.
No help for EV transition
Included in the main body of the Budget were various proposals that will impact ESG, including the government’s decision to continue its temporary 5p cut to fuel duty as part of its strategy to tackle the cost of living crisis and to cancel a planned increase in fuel duty in line with inflation for 2024–25.
The decisions will save the average car driver £50, said the government. In its economic and fiscal outlook published on the same day as the Budget, the Office for Budget Responsibility estimated that that the cumulative cost of freezing fuel duty rates between 2010–11 and 2024–25 had risen to around £90bn.
Colin Walker, transport analyst at the Energy and Climate Intelligence Unit think-tank, argued that if the chancellor really wanted to enable UK drivers to save money, helping them make the move to electric vehicles would “make a much bigger difference”.
“The policies to achieve this, and called for by UK motoring groups, include bringing [value added tax] on public charging in line with VAT on private charging at home by reducing it from 20 per cent to 5 per cent, or temporarily halving VAT on sales of new EVs,” Walker said in a statement.
Contracts for difference boost
The government has also confirmed a record budget of more than £1bn for its latest “contracts for difference” auction round, which will award CfDs to renewable energy developers. It will allocate £800mn to offshore wind, £120mn to “established technologies” including onshore wind and solar, and £105mn to “emerging technologies” such as floating offshore wind, according to the government’s CfD website.
The success of this latest auction round, the government’s sixth, will be keenly watched after no bids were made for offshore wind in its last round in 2023. Low strike prices deterred offshore wind developers from bidding for projects.
Sam Hollister, head of energy economics and finance at energy transition consultancy LCP Delta, said the £1bn was “a welcome development given last year’s failed auction”.
“However, it may not be enough to get the UK back on track with time running out to build the additional 23 [gigawatts] needed by 2030,” he added in a statement.
Emma Pinchbeck, chief executive of industry body Energy UK, agreed. “Fair play to Desnz [the Department for Energy Security and Net Zero] for fighting for pounds in a pre-general election Budget,” she wrote on X. The £1bn was a “good settlement, but it won’t be enough to get the capacity we need after two poor auctions”.
LCP Delta analysis expects the £800mn for offshore wind to procure around 4GW to 6GW in the upcoming auction.
“Investment in renewables is an investment in the UK’s future and this Budget should restore confidence with investors that the UK is still committed to its net zero goals,” said Hollister.
Aldersgate Group executive director Rachel Solomon Williams called for the government to set out the details for achieving its 50GW offshore wind target by 2030 and its grid decarbonisation commitment, “to help leverage vital investment into the deployment of renewable energy and local areas”.
“To realise the Budget’s stated vision of long-term growth, it is essential that government put forward a long-term industrial strategy, helping to drive investment across the whole of the UK and ensuring the current and future skilled workforce needed to deliver a net zero economy,” said Solomon Williams.
One area where the government suggested it was ready to offer investors more certainty was around planning. Continuing commitments made in its 2023 Autumn Statement to reform the UK’s planning system and accelerate connection times to the electricity grid, the government today published a consultation on a streamlined planning service for major commercial developments. It said it had tasked industry with putting together a plan to slash connection times for viable projects, implementing a new connection process from January 2025 that will only offer projects connection dates when they are ready to progress.
“An inability to connect to the electricity network is a huge challenge facing the sector today,” said Susie Elks, senior policy adviser at climate think-tank E3G. “Hundreds of low-carbon projects which could lower the cost of electricity are stuck, unable to connect,” she said. “The mentions in the budget give us hope that the political momentum to try and resolve these issues is being maintained.”
James Alexander, chief executive of the UK Sustainable Investment and Finance Association trade body, said on LinkedIn that his organisation’s energy report, released in late February, “clearly shows that planning wait times and insufficient grid connectivity has driven as much as £115bn in private investment overseas”.
More challenging for investors
The government has also extended its energy profits levy, more commonly known as a “windfall tax” on oil and gas profits, by one year until 2028–29, recognising that “gas prices are forecast to remain abnormally high” until at least then.
“The extension to the energy profits levy is the latest in a series of changes to the oil and gas windfall tax since it was introduced in May 2022,” said Claire Angell, head of energy tax at consultancy KPMG, in a statement. “For an industry which rightfully seeks fiscal stability given the long-term nature of their investments, this makes the UK a more challenging place in which to invest.
“While the political pressure to balance the books in this Budget was clear, this may have unintended consequences and a potential cost to the taxpayer in the medium to long term,” she continued. “Postponing or shelving new development projects and the early cessation of production will reduce future tax revenues.”
E3G campaigns director Ed Matthew echoed Solomon Williams’ call for some long-term thinking. “Uncertainty on how the UK will decarbonise industry, homes, power and transport has led to chronic underinvestment,” he said in a statement. “This is compounded by a lack of green tax breaks, low levels of public investment and not having a long-term net zero investment plan.
“The UK is being outcompeted on cleantech investment by the US, Europe and China as a result,” Matthew continued. “The UK economy is flat-lining and this Budget will fail to bring it back to life.”
Following the Budget, Conservative peer Martin Callanan confirmed that the government would be moving forward with its plans for a clean heat market mechanism, considered by many as essential to decarbonise heating systems and reach heat pump targets by providing, in the government’s words, “clarity and stimulus for investment and innovation throughout the manufacturing and installer supply chain”. The UK has the lowest take-up of heat pumps in Europe, according to the European Heat Pump Association.
Investor appetite
Ahead of the Budget, companies, investors and campaigners had called for the UK government to demonstrate its full commitment to net zero.
“There is a huge investor appetite out there … to get behind the net zero transition,” ECIU head of parliamentary engagement Alasdair Johnstone said, but cited Prime Minister Rishi Sunak’s recent decisions to row back on various green policies, including delaying a planned ban on the sale of new petrol and diesel cars from 2030 to 2035, as “interventions [that] create uncertainty”.
Sebastian Peck, managing partner at venture capital firm Kompas VC, also underlined the need for clarity in the move to net zero. “I don’t think investors are looking for handouts,” he said. “Investors are looking for a clear framework and predictability, and if you then underpin that with financial incentives in the form of tax breaks and non-dilutive funding, that’s great, but before you take budgetary measures you need to do the fundamental work of setting clear policy targets and committing to them.”
He suggested that a “cross-party consensus” was needed to devise a long-term industrial strategy for the UK that would assess the technologies needed for the net zero transition such as batteries and renewable energies.
Additional reporting by Philippa Nuttall
This article first appeared in Sustainable Views, a service by the Financial Times Group
