Market analysis – Q3 2023
This summer we have seen scorching Saharan’s temperatures across southern Europe and devastating wild fires. In the UK, while it is not unusual to spend the summer holidays wrapped in a beach towel shivering behind a wind-break, this year has been a wash-out. July was one of the wettest on record and a sharp contrast to last year’s heat waves and widespread droughts. Climate change has never felt so tangible and lends urgency to action to meet net zero targets.
Or, perhaps not.
At the same time as these extremes of weather have made themselves felt across Europe and other continents, the UK government, perhaps galvanised by its surprise election win in Uxbridge and the unpopularity of the extension to Sadiq Khan’s ULEZ policy to the London suburbs, appears to be turning tepid on some climate change commitments.
Rishi Sunak has declared himself to be pro-car and announced new oil and gas licenses in the North Sea. There is also a great deal of speculation about whether the UK Government will modify some aspects of its net zero policies to avoid damaging the economy. For example, will it actually bring in the Zero Emissions Vehicle mandate to ensure that 22 per cent of all new cars sold by car manufacturers are electric by the start of next year, or risk fines of £15,000 per car if they miss the target?
Perhaps the Government is taking inspiration from the cooling interest in ESG investments seen in the markets. According to financial press reports over recent weeks, money is now starting to flow out of companies and funds that are heavily invested in ESG initiatives, which may have either peaked too early, or not delivered the promised returns causing buyer’s remorse, or maybe investors are simply a bit tired of it all.
There is plenty of evidence of wobble in the commitment to act against climate change as Parliament returns this September and the starting pistol fires on election positioning ahead of a possible 2024 General Election. But what does this wobble mean for UK listed companies and their investors? Is it likely that the Government will step back from new sustainability reporting requirements in a bid to ease the burden on businesses, or make the London market less bureaucratic and more attractive?
The short answer is no. The move towards increased sustainability related financial disclosure is global. It would be very hard for individual Governments to deviate from the overall direction of travel. The drive comes from the need to access capital, as well as third party stakeholders and significantly, customers. Even in jurisdictions where reporting on sustainability is not strongly encouraged or enforced, large companies have tended to do so regardless; when global competitors are all reporting the same information under IFRS, it could be considered damaging not to follow suit, not least from a reputational perspective.
In the London markets some forms of sustainability reporting are already mandatory and it is very unlikely that these listing rules will change. As more and more voluntary disclosures become regulatory requirements, some companies may stall until the point that adoption becomes mandatory – this is particularly true for smaller companies – but the push-back against voluntary reporting is usually because of resource issues, rather than a lack of commitment to the cause.
Another obstacle in the path to adopting sustainability reporting requirements is the “alphabet soup” of regulations and guidance across different jurisdictions and regulatory bodies. This, too, is being overcome by increasingly harmonious and homogenous interpretations of IFRS directives. The International Sustainability Standards Board inaugural standards—IFRS S1 and IFRS S2— which were issued on 26 June 2023 and come into effect from January 2024, are echoed in the EU by the Corporate Sustainability Reporting Directive which will also be phased in from the start of the new year. Sustainability reporting will continue to be a focus for companies in 2024 despite any political campaign rhetoric that pours cold water on net zero commitments.
Ultimately, the most significant force keeping us on the path to sustainability is the economy itself. As all good governments in the past have done in the build-up to a General Election, the Prime Minister (and no doubt the Leader of the Opposition as well) will most likely announce huge spending plans to boost the UK economy and create jobs. Bet your bottom dollar they’ll be green.
While the UK Government doesn’t have pockets deep enough to pull out a $369 billion Inflation Reduction Act, as President Joe Biden did last August, it is a racing certainty that Rishi Sunak will announce some new green initiatives in the near future with the aim of improving the economy ahead of the forthcoming election. Investors will follow the money and any such plans to re-ignite the UK economy could also re-ignite investor interest in the ESG sector.
In the meantime, while we wait for the inevitable campaign announcements and promises to make their impact on the market, companies and their advisers should put sustainability on their “to do” list for their return to the office after the summer break, and use the remaining four months of the year to prepare to comply with the new ISSB sustainability reporting standards.
This article was originally published in the Q3 2023 Corporate Advisers Rankings Guide. For more information, please contact Mark Ling.
