Johnston Carmichael: firms must prepare for sustainability legislation

28/11/2023
Mark Stewart (Johnston Carmichael)

by Mark Stewart, Corporate Finance Partner and Head of Energy, Infrastructure and Sustainability at accountancy and business advisory firm, Johnston Carmichael.

IF ANYONE was in any doubt that the lack of a coherent and long-term energy strategy is thwarting our net-zero ambitions, the events and news in recent months, have brought this into sharp focus.

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When the stakes are so high for people and the planet, it’s incomprehensible that energy continues to be a political football, subject to the vagaries of short-term political cycles and policies, based on knee-jerk responses geared towards winning votes rather than addressing the energy trilemma. 

Findings from the Aberdeen & Grampian Chamber of Commerce Energy Transition Survey echoed our discussions with energy leaders at a recent Johnston Carmichael roundtable with energy leaders and mirrored our reflections on this year’s Offshore Europe. During our roundtable the messages were loud and clear:  the energy industry is in flux, largely due to policies outwith our control, financing and delivering the energy transition are becoming more challenging and ESG, although high on the agenda, is not being given the importance it should. 

The Chamber’s survey revealed that over half of businesses believe that none of our political parties are delivering the best policies for the energy transition, and respondents firmly believe that the right conditions and incentives to give the private sector the confidence to invest in the energy transition are not being delivered by our governments. 

Investing in sustainability and the energy transition has slowed when it should be accelerating if we are to avert a climate catastrophe. 

With the dawning of the realisation that oil and gas will be required for many years to come and that it is better to produce home-grown energy than import it at a higher cost with a greater environmental footprint, we’ve seen the UK Government’s U-turn on net-zero policies, approval of new oilfields and the granting of new oil and gas licences. The Chamber’s survey findings reflect this shift, revealing that, despite the negative impact of the Energy Profit Levy EPL, optimism and confidence are on the up, with a higher percentage of businesses working at optimum levels in both the UK Continental Shelf and internationally. This more upbeat sentiment was also evident at our roundtable and on the exhibition floor at Offshore Europe. 

On the other hand, activity in renewables which should be gathering pace simultaneously has instead and, concerningly, decelerated with projects being pushed out or cancelled. Rapidly rising costs in a sector where margins were already tight have added to the financial woes of developers and major suppliers, and contributed to the failure of the latest CfD (contracts for difference) allocation round to attract any bidders.  As a consequence, the UK Government announced last week that offshore wind strike prices in AR6 will increase by 66% to £73/MWh. 

There is therefore no surprise that the Chamber’s survey also revealed a further decline in the number of companies believing that energy transition credentials are critical to their long-term success, and a marked decrease in those developing and/or accelerating their net-zero strategies. Worryingly, 46% of respondents don’t have an Environmental, Social and Governance (ESG) strategy, although 27% are looking to develop one. 

Against this backdrop, Johnston Carmichael continues to encourage companies to seriously consider their ESG strategies. Why? Because regardless of everything that’s causing this shift in the net-zero landscape, legislation is coming and sustainability standards will become mandatory and, crucially, audited.  

In the next few years, all large companies in the UK will need to transition from Streamlined Energy Carbon Reporting to International Sustainability Standards, which are intended to provide a common framework for companies worldwide to disclose information related to their sustainability performance. 

A comprehensive ESG strategy can be the link between the two regimes, preparing companies now for the in-depth data gathering that will be required from their myriad of  systems to comply with ESG frameworks and Sustainability Standards. 

Enlightened companies already recognise that a robust approach to ESG is needed to attract people, customers and investment. Companies who have not already adopted a coherent, integrated ESG strategy must start preparing for a more regulated, compliance framework.

Notwithstanding the regulation issue, there are many other reasons why ESG is so important with finance being top of the list. The GFANZ alliance, established at COP26, was resolute in its commitment to providing global finance to only those businesses who have a clearly articulated net zero journey and a demonstrable ESG strategy, though the further we move away from the Glasgow summit the less resolute that commitment appears to be. 

The sentiment at our roundtable event was that ESG criteria has gained significant traction in the investment world in recent years. Investors are increasingly considering ESG factors when making investment decisions, driven by a combination of ethical considerations, risk management, and the belief that companies with strong ESG practices may be more sustainable and resilient in the long term.  

However, it’s essential to note that challenges and debates exist within the ESG space. Issues such as standardisation of ESG metrics, greenwashing (exaggerating or misrepresenting ESG practices), and the subjectivity of ESG criteria, pose challenges to investors. Additionally, the quantifiable impact of ESG on investment performance can vary, and not all studies show a clear and consistent relationship between strong ESG performance and financial returns.

The energy mix can change over time due to policy decisions, technological advancements, and market dynamics. The UK has been actively working to increase the share of renewable energy in its energy mix, to reduce carbon emissions and transition towards a more sustainable energy system. But is the pace of change fast enough to transition to net zero by 2045 in Scotland and by 2050 in the rest of the UK? That is the real question and the undercurrent of opinion we’re hearing suggests that these targets are ambitious given the rate of progress. 

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