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Climate Assets monthly update: Inflation bites on the Climate Agenda

Date: 16 November 2022

Our new Prime Minister seems to have brought much needed stability to financial markets as well as more confidence in the UK’s energy transition strategy to a fossil-fuel-free economy.

He is perceived as much more ‘Green’ than his predecessor, Liz Truss, and is seemingly more in tune with the environmental measures in the Conservative Party 2019 Manifesto. According to the Guardian, ‘he is a believer’. Time will only tell.

So, what issues does Mr Sunak have piling up on his desk?

High energy prices, supply chain disruptions and a cost-of-living crisis, to name but a few. The latest casualty in the UK’s ambition to become more sustainable is the collapse of Britishvolt, the homegrown UK battery start-up. The company aspired to build the UK’s first Gigafactory at an estimated cost of c.£4bn. Now that the ‘era of free money’ has come to an end and costs are rising, investors are shying away from long duration assets, with cashflows far into the future, in exchange for shorter duration assets with visible cash flows. To some this may seem unfortunate or just insignificant, but the UK needs 3 Gigafactories by 2025 and 10 by 2040 to meet battery demand for electric vehicles. When costs are rising and capital becomes expensive, young companies struggle to become profitable, as we have seen this year with many falling into administration. That is why the Climate Assets strategy focuses on profitable mid-to-large companies with strong cash flows and a sizeable market share.

Rising costs of raw materials and significant supply delays are affecting renewable energy companies, specifically wind turbine manufacturers. A price cap on renewable energy generation, which is yet to be set, has also generated uncertainty for renewable energy investment trusts, which is how we prefer to gain exposure to green infrastructure. Most of the investment trusts we favour don’t take construction risk, as they buy assets that are already built and for the most part connected to the grid. This is currently an area of focus for us, and we are engaging with all the green infrastructure investment trusts we invest in to further understand their supply chain management. In particular, we are interested in how they have been navigating the inflationary environment, managing supply chain disruptions, and mitigating the ESG (environmental, social and governance) risks associated with the life cycle of wind turbines. I will share our findings in the new year once we’ve spoken to each company and evaluated our research.

I don’t envy Rishi Sunak’s to-do list and look forward to more clarity as his premiership progresses. I expect (and hope for) him to focus on long term policies to underpin energy security and reduce our reliance on fossil fuels. However, this is a demanding ask, as 20-to-30-year climate goals are not compatible with 4-year political cycles, in the PM’s case a 2-year term, and therefore the onus for assessing and enforcing climate initiatives falls, in part, on the private sector and climate champions. We need to work together with the rest of our industry to ensure we establish the policy and financial mechanisms to support the energy transition.

With COP27 now in full flow, we will share our views on the summit in next month’s newsletter. I am a believer that goals birthed from the co-operation between nation states filters down to goals for companies and I hope to see more progress from our leaders.

Author

Harry Gibbon

Investment Manager

I assist with the management of clients’ portfolios for private clients, pensions, trusts, charities and funds, including the Climate Assets. I also work with colleagues from across the business striving together to enhance the service we provide to our clients.

Climate Assets Funds

The Climate Asset Funds invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.

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The value of your investments and the income from them can fall and you may not recover what you invested.