We look at the implications and opportunities of the UK’s journey to Net Zero by 2050.
We recently invited Martin Baxter, Director of Policy and External Affairs and Deputy CEO at IEMA to talk to IGD’s Technical Leaders Forum about the UK’s transition to Net Zero. As a collaborative industry group, the purpose of the Technical Leaders Forum is to help provide thought leadership on technical issues facing the whole food and consumer goods supply chain and inform IGD’s work programme.
A rapidly evolving policy framework
The Climate Change Act sets a long-term carbon reduction target for the UK – this was initially an 80% reduction in emissions by 2050, but it has since been increased to 100%.
In December 2020, the Climate Change Committee (CCC) published the Sixth Carbon Budget, the UK’s first carbon budget set against a trajectory to Net Zero, for the period 2032-2037. By the end of this period, we will only have 13 years left to achieve Net Zero, so these targets see a significant tightening in carbon budgets. The Sixth Carbon Budget sets out the CCC’s recommendations to the Government, who will review the targets and create a detailed plan as to how the UK will achieve them. This will include what the Government will invest and when, and how this investment will be distributed. Businesses will then need to translate what that policy means for them, and where investments need to be made to meet the targets.
There is also a new Environment Bill currently going through parliament and expected to receive royal assent in Q1 of 2021. It sets a new governance framework for how the environment is going to be managed over the next few decades, with legally binding, long term targets for improving the natural environment, including waste and resource efficiency, water, air quality and biodiversity. Many businesses were involved in the consultation with Defra on due diligence on forest risk commodities. This consultation is now closed and enabling legislation has been inserted into the Environment Bill.
The Environment Bill is highly relevant to our Net Zero target, and nature-based solutions - such as the Biodiversity credit market and Environmental Land Management Scheme - are an important part of both, helping to mitigate emissions, for example through the restoration of peat lands, soil and carbon sinks. They will also enhance resilience through water and land use to prevent flooding of urban areas.
The role of the finance sector
The Government has recently made a number of announcements relating to sustainable finance:
- Firstly, the UK is going to introduce a Sovereign Green Bond in 2021. This will help the Government position the City of London as a global centre for sustainable finance.
- Secondly, more robust environmental disclosure standards will be introduced, and this will affect all food and grocery businesses. Financial disclosures will be mandatory by 2025, but for some organisations, they’ll be rolled out from 2023 and implement the reporting framework recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
- Thirdly, the UK will implement a green taxonomy. This is a common framework for looking at which activities will be defined as ‘environmentally sustainable’, which will give us a better understanding of how an organisation’s activities investments will impact the environment.
These announcements show a mindset shift: our finance system should not only finance sustainable activities but be ‘greener’ in the way it looks at all activities. This is already happening in some areas; portfolio holders are starting to investigate to what extent their investments are aligned with sustainable milestones – such as the Paris Agreement – and we can see that investors have started to divest from certain areas to bring their portfolios in line with more sustainable activities. Part of the reason for this is that ‘greener’ businesses may be seen as better run companies, and investors are more likely to get return on their investments.
Understanding transition risks
Started in 2015 and spearheaded by Mark Carney (Financial Stability Board Chairman and Bank of England Governor) and Michael Bloomberg, the Task Force on Climate-related Financial Disclosures (TCFD) aims to understand what our risks are in transitioning to Net Zero. Understanding these risks is critical to reaching Net Zero. For example, the Government announced in November that sales of new petrol and diesel cars and vans will end by 2030. For vehicle manufacturers, this poses legal and transitional risk, and so these businesses should be looking at those risks in detail – for example, the effect it will have on cash flow and balance sheets. It’s also important to consider how technology will change – will it make some equipment obsolete?
Risks must be assessed through the whole value chain. As we move to more healthy and sustainable lifestyles, what effects could the impact of plant-based diets have on your organisation? Crop yields, for example, will be significantly impacted by the changing climate, as the UK will have warmer and wetter summers, hotter and drier winters, and more intense periods of rainfall. The crop varieties currently used may not generate enough yield for your requirements in 20 years’ time – businesses should discuss at what point they should start to make those transitions.
We must also consider the financial implications. As investors start to look at nature-based financial disclosures, businesses need to think about assets like soil quality: what will the impact of degrading quality be, and are there any opportunities to improve? Articulating what these may look like on balance sheets, cash flows and income statements will be of interest to shareholders and investors.
There are three main takeaways to consider around these changes. Firstly, there’s a real commitment from the Government to not only slow the decline of the environment, but to invest in the restoration process. There’s also recognition that we have to treat the environment as an integrated system. This means that there’s more systems thinking going into environmental protection and its relationship with climate, but also how this relates to society and the economy. And lastly, it’s clear that there are strong links between environment and economy and that change will be being driven through the finance system.