• FLM Wealth Management

How will your investments be affected by the UK's transition to net zero emission?

Updated: Oct 1, 2019

There has been a huge shift in the way people are approaching sustainable and responsible investing, especially in the past 18-24 months. You will probably have noticed the increase in discussions around the environment and trying to encourage individuals to improve their way of living, in the news and posted all over social media. I think the biggest influence must be the unforgettable David Attenborough educating people on how important looking after our planet is, and even making an appearance at Glastonbury Festival this year!

What is the UK's recent commitment to net zero?

Before Theresa May stepped down as Prime Minister, she sought to cement some legacy in law to commit to reach net zero carbon emissions by 2050. On the 27th of June, the UK became the first major economy in the world to pass laws to end its contribution to global warming by 2050. The target is to bring all greenhouse gas emissions to net zero by 2050, compared with the previous target of at least 80% reduction from 1990 levels.

The UK has already reduced emissions by 42% whilst growing the economy by 72% and has put clean growth at the heart of our modern Industrial Strategy*. This could see the number of 'green collar jobs' grow to 2 million and the value of exports from the low carbon economy grow to £170 billion a year by 2030.

What shifts are likely to happen in the market?

1) Devaluation of oil and gas companies

  • As technology advances and we become more familiar with items like electric cars, the need for materials like oil decreases and as a result so does their value.

  • When the cost of using a more environmental resource, as well as the impact on the environment reduces, then resources like oil and gas become less popular.

2) Stranded real estate assets

  • Stranded assets are now generally fossil fuel supply and generation resources which, at some point prior to the end of their economic life are no longer able to earn an economic return. They are unable to meet the company's internal rate of return, as a result of changes associated with the transition to a low-carbon economy.

  • Existing assets, there is research to highlight which ones are more at risk of becoming 'stranded' under low demand scenario. There are already examples of coal mines, coal and gas power plants, and hydrocarbon reserves which have become standard by the low carbon transition.

3) Devaluation of companies that do not have a strategy in place to manage climate-related risks and opportunities

  • Investors have recognised the value of companies that considers their impact on the environment and the strategy they have in place to improve their carbon footprint.

  • The need to have a positive strategy in place to ensure that your companies' emissions are decreasing, this is more important now than ever and the UK government are putting strong policies in place to ensure we meet our target of 2050.

  • By not addressing this issue, companies are putting their business and employees a trisk, as this could have a monumental impact on business in the future and is likely to eventually result in heavy fines linked to rating of company sustainability.

4) Opportunities presented by new policy and how this will affect different assets**:

How much will net zero cost?

There have been rapid cost reductions during mass development for key technologies including offshore wind and batteries for electrical vehicles. As a result, it is expected that a net zero Greenhouse Gas target can be met at an annual resource cost of up to 1-2% of GDP to 2050, which is the same cost as the previous expectation for an 80% reduction from 1990.

Renewable power is now actually as cheap or cheaper than fossil fuels in most parts of the world, which will only improve this position in the long term and as there is more development in these areas.

* https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law

**Mercer 2015 'projected impacts'


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