Blog

Investors to UK – help us invest for growth by managing climate risks

4 out of 5 institutional investors are worried about the impact of climate-related risk on their portfolio

Share
Image shows Thames Barrier, London
Thames Barrier, London. Photo by Naveen Annam from Pexels.com

With growth the top priority for the new UK government, action is essential to unlock investment at scale across the UK. The net zero transition offers significant opportunities to drive clean growth and economic resilience through investment – with the CBI estimating that delivering net zero could unlock £104 billion of inward investment by 2040.

The Chancellor’s speech last week recognised the role that the climate transition plays in her economic vision for the UK. However, success is not guaranteed, with investors increasingly concerned about weak climate-risk management – which has consequences both for investment flows and macroeconomic stability.

Geopolitical turbulence has created a window of opportunity as investors revisit their assessments of where best to allocate their capital. Active steps taken by the UK now would provide a strong signal to investors and could help to boost UK investment. A new survey, commissioned by E3G and conducted by Censuswide, polled 100 UK-based institutional investors from 16 to 26 December 2024. The findings show a clear link between climate-related risks and investment decision-making, and growing demand for government action to manage these risks.

Climate-related risks can be divided into two categories: physical risks from climate impacts which can lead to financial losses and disrupted operations, and transition risk which is caused by problems arising from firms decarbonising too slowly or making incorrect strategic choices.

Both risk types threaten the economic health of individual businesses and households and could also affect macro-economic stability. In 2024 – the hottest year on record – Munich: Re estimated that catastrophes alone cost the world $320bn.

Climate-related risks impact on investor decision making and can lead to less capital being allocated where it is needed, and/or less capital being allocated overall. 82% of the investors surveyed are worried about the impact of climate-related risks on their portfolios. 40% have already sold or reduced holdings in an asset due to its exposure to climate related risks, while 46% have avoided investing in an asset due to its exposure to climate related risks. This is of particular concern for the UK, where low investment is a major cause of the country’s stagnant growth.

Government action is key to remove UK investment barriers

Investors overwhelmingly back policy steps to manage climate-related risk. There are two key barriers the government must address to tackle the downward trend of capital allocation in the UK – one at the entity level and the other at the sectoral/national level.

Alongside providing investors with the credible, comparable information they need to commit funds, the government must also take steps to drive the economy to a greener, more resilient future. 88% of investors surveyed stated they would be more likely to invest in a sector covered by a government sectoral investment pathway.

A commitment to a whole of economy clean-growth strategy – which aligns all the tools at the government’s disposal – is essential to build market confidence in UK climate-related risk management, and give them a framework to invest alongside. The strategy should sit alongside and be integrated with a strong UK Adaptation Plan.

Underpinning a clean growth strategy with a Net Zero Investment Plan would enable the government to leverage the investment needed to meet UK emissions goals. By setting out a clear direction of travel, the government can provide the policy certainty and stability the private sector has been calling for, while greatly reducing transition risk and targeting public investment to address market barriers. Financial institutions representing over £10 trillion AUM have called on the Chancellor to deliver such a plan.

Investors back transition planning as a way to manage risk, increase transparency, and drive growth

If investors cannot quantify risks, they are less likely to allocate funds. Transition plans provide stakeholders with information on how a company will meet climate goals and contribute to economy-wide transition. 86% of investors think disclosure of a climate transition plan is a valuable tool for their investment decision making.

Transition plans also show global investors how UK companies plan to tackle climate-related risks – whether physical or related to transition – and take advantage of related opportunities. 86% of investors are more likely to invest in a company if it is taking active steps to manage its climate-related risk.

The government’s consultation on mandatory transition planning, due early this year, provides a much-needed opportunity to deliver these reforms at pace and send investors and markets a clear signal that stability and competitiveness remains a priority for this government.

Related

Subscribe to our newsletter