In the aftermath of three by-elections held in England, there was a noticeable shift in the discourse among the ruling Conservative Party.
Many had expected the party to lose the Uxbridge and South Ruislip seat (vacated by ex-prime minister, Boris Johnson) to Labour - however instead the Tories managed to cling on (after a recount), with many experts putting the victory in part down to Labour mayor Sadiq Khan’s plans to extend the Ultra Low Emission Zone (ULEZ) out into the suburbs of London, including Uxbridge.
While Khan believes his policy is necessary to improve the air quality - and health - of his constituents, the policy has been proving unpopular with people who face having to pay a £12.50 daily charge just to take their car off their drive. Election experts believe the anger and concern this created was enough to stop voters backing Labour in the way they did in the simultaneous by-election in Selby and Ainsty - where the party managed to overturn a 20,137 majority to win by over 4,000 votes.
In the immediate aftermath, it was clear the lessons that the Conservative high command was taking from these two results. Housing Secretary Michael Gove warned in The Sunday Telegraph against treating the environment as “a religious crusade”, calling instead for “thoughtful environmentalism”.
And days later, Prime Minister Rishi Sunak unveiled plans to grant “hundreds” of new oil and gas licences for North Sea exploration. “Even when we’ve reached Net Zero in 2050, a quarter of our energy needs will come from oil and gas,” he claimed.
Many have seen this as a worrying effort to row back on previous administrations’ commitments on Net Zero, arguing that investing in things such as carbon capture, usage & storage (CCUS) technology - as Sunak also pledged alongside the North Sea announcement - amount to little more than a fig leaf covering a return to oil extraction. Critics have warned that the UK risks losing its position at the forefront of the climate change agenda and the drive to Net Zero.
However, the response of the investor community to these moves has perhaps been more instructive - and is certainly worth the government taking note. In most cases, there seems to have been little more than a shrug over the government’s apparent change of direction. Most do not seem phased by the announcement and instead are focusing on what they are already doing: looking at investing in a range of technologies and projects that are far more interesting and progressive than the next oil and gas asset.
Indeed, for many in the investor community, the shop has long since sailed on fossil fuel assets, for a number of reasons.
First, there is the real threat that, as countries everywhere wean themselves off carbon-based energy solutions, investors could be left holding stranded assets.
Second, more and more investment companies are recognising that the individuals whose money they are investing are increasingly conscious of where their money goes and what it is spent on - and ethical considerations are high on the agenda. ESG considerations are now a much greater part of investment managers’ requirements when considering where to invest money, meaning the amount they can realistically put into fossil fuels will be significantly limited - even if projects can show significant returns.
Which brings us to another reason for investors moving away from the fossil fuel industry: there is mounting evidence that investments in renewables - particularly solar and wind - perform better and offer better returns than traditional energy assets.
As one investor, who sees attractive opportunities in wind and solar - as well as waste to energy - puts it: “Net Zero is here to stay; we have to work out how we work with all parties to deliver that.”
None of this is to say that Sunak won’t have any interest in his North Sea licences - there will be plenty of those already in the oil and gas industry clamouring to take part.
However, it does feel somewhat short-sighted, as the wider market is increasingly moving away from this area. One of the reasons put forward for Sunak’s move has been to gain votes in Scotland, with places like Aberdeen fearful of what might happen if the North Sea oil taps are turned off.
But that is to ignore what is already happening in Aberdeen, where a major joint venture with BP is looking to transform the economy into a hub for hydrogen power. It might be better to focus on supporting endeavours like this - including looking to train and re-train people in new technologies - rather than falling back on licences for oil and gas extraction.
While Sunak’s announcement will not have much impact on those companies and investors whose businesses are now increasingly geared towards supporting the energy transition, it may not be helpful for Britain’s role in this effort. Even before the announcement, many investors had been warning that the UK is simply not seen as a stable environment in which to do business these days, so making what can be perceived as a major policy shift away from the Net Zero drive will only embellish that view, making it tougher to attract foreign investment.
“There is a UK premium for international investors: the UK has an uncertain political environment because it is not clear what either main party stands for,” one investor said recently. “For example, in solar assets, the sale prices are far less competitive in the UK compared to elsewhere in Europe, where there are far more stable governments.”
Over recent years, Net Zero and the energy transition have been among a small group of issues that had been considered settled: while different parties may argue over how to get there, the destination was largely agreed by all. If the government is hoping it can scare up some votes in next year’s General Election (and avoid Selby and Ainsty results across the political map) by rowing back on its green plans, it may find it is simply shooting the UK in the foot, as investors and other countries take the lead and find new opportunities for growth and prosperity.