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22 September 2023

Banks hate Rishi Sunak’s U-turn on net zero

City financiers may not be tree-huggers, but uncertainty and risk are expensive.

By Will Dunn

Britain’s bankers may have assumed this time last year that Rishi Sunak, formerly of Goldman Sachs, was one of their own. As chancellor and then Prime Minister, he’s pursued a deregulatory agenda – the “Edinburgh Reforms” – that many in the City welcome, but for financiers, this week’s U-turn on net-zero policies is another matter.

The City is not known for its tree-hugging politics – British banks still finance fossil fuels projects to the tune of tens of billions of pounds a year – but if there is one principle that unites bankers worldwide, it is this: risk is expensive. Uncertainty of any kind is a cost, and political uncertainty is one of the big ones.

Over the past two days, while the car and energy industries have issued angry statements against the “confusion and uncertainty” (the Society of Motor Manufacturers and Traders) and “constant tinkering” (British Chambers of Commerce) with a policy area that directs most of their new investment, the people who finance those investments have also been fuming.

[See also: Rishi Sunak is dancing to Nigel Farage’s tune]

Here’s the problem: even though much of what Sunak announced involved cancelling policies he’d just made up (an improbable number of bins, meat tax), the change of sentiment really does make a difference. The one thing the UK had going for it in terms of green investment was the fact that both of the biggest political parties were broadly in agreement on the necessity and timing of the programme. So, even though the US has put in place a vastly more ambitious programme of investment in meeting net zero, companies also have to weigh the risk that a Republican might rip that up at the beginning of 2025. Donald Trump forbade his own government from talking about climate change; he is easily crazy enough to make wind turbines illegal.

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City sources tell me that despite this risk, they are now seeing a trend of British companies creating intellectual property in the UK, then patenting it in the US and seeking to commercialise it there, using the tax breaks offered by the Inflation Reduction Act, and (this is the important bit, for the City) financing it using American banks.

The finance sector is also annoyed at the lack of detail in British net zero policy. A lot of big banks have made significant and very public commitments to net zero, and it is, according to those in the industry, generally agreed to be the most significant opportunity for growth. Vast sums are being moved behind it – the Net Zero Banking Alliance represents $74trn in assets – but without detail and clarity, these are being held up. The phrase “pipeline of investable projects” is sweet music to the ears of the City, but without stable policy it doesn’t materialise.

Even if you’re a bank that loves to invest in coal, this is still the case: if you don’t know what the plan is, no one will want to borrow a lot of money for coal mines.

The same is true across the economy: every plumber needs to know when they should retrain to work with electric boilers and heat pumps. But the banks are fundamental to this because they’ll be the ones lending the money for the training, and Sunak – sold as a competent technocrat – is gambling their confidence on winning over a relatively small chunk of the Tory base.

[See also: Liz Truss’s return is a gift to Labour]

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