Transitioning to net zero carbon – the UK’s political and institutional priorities

“Tackling Climate Change” – a Virtual World Tour ahead of COP26: United Kingdom: Part 1

This marked difference suggests that sustainability and, more specifically, environmental criteria may firmly guide the business strategies of ‘Corporate UK’. Is that so? And does it extend to the country’s political agenda, its regulators and its public sector?

Kicking off our Virtual World Tour at home, we start in this article with an overview of the UK’s political and institutional priorities for transitioning to net zero carbon emissions, covering in more detail:

  • The UK’s history of green legislation
  • Its current state of green play, including greenhouse gas (GHG) reduction targets and national climate policies and programmes
  • Climate action undertaken by the country’s public sector, and
  • The progress of UK businesses on their journey to net zero carbon

The UK’s green legislation and regulation – a ‘Green Industrial Revolution’ in the making

The UK has long been a frontrunner globally in tackling climate change. Focusing on transitioning to clean power, it has been the fastest country in the G20 to decarbonise their economy since 2000[2]: between 1990 and 2018, the UK managed to reduce its carbon emissions by 44% - despite its economy growing by 75% at the same time[3]. Consequently, in 2020, the UK came in second place behind Sweden in the Climate Change Performance Index, an independent monitoring tool that tracks annually the climate protection performance of 57 countries, which are responsible for over 90% of GHG emissions since 2005.[4]

How did it get there? And what are the UK’s next green milestones?

The 2008 Climate Change Act kicks off ‘green thinking’…

The UK’s landmark Climate Change Act paved the way for its subsequent climate change action. Passed in 2008 with an overwhelming majority amongst political parties (463 to 3), it was the first legally binding national commitment to climate change[5]. The Act committed the UK to reducing GHG emissions by 80% by 2050, compared to its 1990 levels. The target was revised in 2019 to net-zero emissions when the UK became the first major economy to pass a net-zero-emissions-law.

A key element of the Climate Change Act is the introduction of a series of ‘carbon budgets’. Each carbon budget provides a five-year cap on total GHG emissions, which shouldn’t be exceeded in order to reach the net-zero target. The caps are set twelve years ahead of time and can only be amended by the government under very limited and strict conditions.

Five carbon budgets have been set since the Climate Change Act passed, covering 2008 to 2032. The first two emission targets were met, and the UK is on track to meet the third. However, the Committee on Climate Change (CCC), the independent statutory body that advises UK government and parliament on carbon budgets, has warned that the UK is set to miss the fourth and fifth. The sixth budget and first set in line with the net zero target, published in December 2020 by the CCC, requires a 78% reduction in UK territorial emissions between 1990 and 2035 amongst other steps[6]. There’s some concern whether the UK can achieve this: in its 2019 report, the CCC warns that England is not prepared ‘for even a 2°C rise in global temperature, let alone more extreme levels of warming […]’ and that ‘many national plans and policies still lack a basic acknowledgement of climate change’[7].

…while a global crisis and COP 26 sharpens the green focus…

However, two years on, a global health crisis – and the prospect of hosting the COP26 in Glasgow – has propelled climate change action to the top of the UK government’s agenda and might just bring the shift in speed the CCC had demanded: in November 2020, Boris Johnson announced a ‘Ten-point plan’[8] for a green recovery to repair the economic damage of the COVID-19 pandemic. The plan will mobilise £12 billion of government investment and potentially 3 times as much from the private sector. Key measures include[9]:

  • Investments of £160 million to quadruple offshore wind capacity to generate power sufficient for all homes in the UK.
  • A £240 million Net Zero Hydrogen Fund to develop 5 Gigawatt (GW) of low carbon hydrogen production capacity by 2030, which will also create around 8,000 jobs. Hydrogen, the lightest and most abundant chemical element, can be used as a clean source of fuel and heat for homes, transport and industry.
  • Delivering new and advanced nuclear power, with notably a commitment of £385 million in an Advanced Nuclear Fund, enabling investment in Small Modular Reactors for nuclear use on a smaller scale; as well as £170 million for a research and development programme on Advanced Modular Reactors.
  • Investments of nearly £3 billion to support the electrification of UK vehicles and develop “Gigafactories” to produce the required batteries at scale; to accelerate the roll out of charging infrastructure as well as extend the Plug-in Car, Van, Taxi and Motorcycle grants to 2022–23 to make electric vehicles more affordable for consumers.
  • Cleaner public transport by updating trains, introduce at least 4,000 more zero-emission buses and give towns and cities ‘cycle lanes worthy of Holland’.
  • £1 billion of investments to make buildings greener, and a “Future Homes Standard” that will be introduced to ensure new houses have 75–80% lower carbon dioxide emissions than those built to current standard.
  • Boosting Carbon Capture, Usage & Storage (CCUS) by establishing CCUS in four industrial clusters - the North East, the Humber, North West, Scotland and Wales - capture 10 megatonnes (Mt) of carbon dioxide a year by 2030, the equivalent of four million cars’ worth of annual emissions.

A month later, the government published the “Energy White Paper”[10], which spells out over 155 pages the measures and policies that will be introduced to help achieve a green revolution. It also refers to government plans to bring forward a series of sectoral strategies, and an overarching Net Zero Strategy in the run up to this year’s United Nations Climate Change Conference, COP26, in Glasgow, which the UK and Italy are jointly hosting.  

Ahead of Prime Minister Boris Johnson addressing the opening session of the US Leaders’ Summit on Climate, which President Biden hosted on Earth Day on 22nd April 2021, the UK government also announced that it’ll set in law the world’s most ambitious climate change target, cutting emissions by 78% by 2035 compared to 1990 levels[11]. This is in line with the recommendation from the Committee on Climate Change (CCC) for the UK to meet the Sixth Carbon Budget.

Notably, for the first time the UK’s sixth Carbon Budget will incorporate its share of international aviation and shipping emissions – allowing these emissions to be accounted for consistently. The UK over-achieved against its first and second Carbon Budgets and is on track to outperform the third Carbon Budget which ends in 2022. This is due to significant cuts in greenhouse gases across the economy and industry, with the UK bringing emissions down 44% overall between 1990 and 2019, and two-thirds in the power sector[12].

…and Brexit doesn’t look to be a distraction…

The UK’s departure from the European Union has raised questions about the potential implications for future UK and EU climate policy. On 31st December 2020, when the UK left the EU it also left the EU Emissions Trading System (ETS). The EU ETS was the first large GHG emission-trading scheme globally. It limits emissions from over 11,000 heavy energy-using installations and covers around 40% of the EU’s GHG emissions[13].

As a result, the UK is in the process of setting up its own domestic trading scheme, which it says will be “more ambitious than the EU system it replaces – from day one the cap on emissions allowed within the system will be reduced by 5%”[14]. Like the EU ETS, the UK system covers emissions from electricity and heat generation, industry and aviation. Both the EU and UK agreed to consider linking their two systems.

Furthermore, the UK government is determined to establish the country as a sustainable finance leader after having left the EU, underlining its commitment with a number of initiatives launched in the past couple years, which we will portray in our next article.

…rather, the UK is proving that a functioning ‘G’ helps achieve the ‘E’ of ESG

The UK’s Corporate Governance system, well renowned and often praised as best practice globally, has also played a crucial role in helping to bring sustainability to the fore. The 2010 UK Stewardship Code for institutional investors is one example for the country’s progressive governance principles, that have been acting as a catalyst for changing the actions of corporates and investors as well as refining the expectations and attitudes of the wider public. The code sets out principles that institutional investors are expected to follow, mainly “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”[15]. The 2020 update of the Stewardship Code requires signatories to annually report on the activities they undertake to fulfil their stewardship responsibilities and the outcomes of this activity.

UK’s public sector sets example for greening the country

The UK government’s ambitions are filtering straight through to the country’s public sector organisations, which have already demonstrated – facing austerity for most of the last decade - that carbon management and energy efficiency not only help tackling climate change but also result in considerable cost savings. The National Health Service (NHS), for example, has reduced its energy-related costs by £2 billion over the past ten years[16].

Looking at energy sources, a survey of 200 sustainability professionals from public sector organisations found that 83% of the respondents had already installed some form of on-site renewable generation capacity to decarbonise their energy footprint[17], yielding impressive results: in the summer of 2018 public-sector emissions had already dropped by a third against a 2009-10 baseline. In particular, the UK’s local authorities and Higher Education sector are making great strides in switching to renewable energy sources: more than 80 towns and cities in the UK plan to use 100% renewable energy by 2050 while many universities are introducing onsite renewable generation through combined heat and power (CHP) systems and large-scale solar arrays. The University of Cambridge, for example, has installed almost 1,500 solar panels to help the institution to reduce it carbon footprint in the UK by 20 per cent, and will be able to meet up to five per cent of its power needs.[18]

While recycling rates of a large number of councils in England have fallen over the last five years, the circular economy concept is slowly becoming a reality across the UK: Peterborough and Glasgow, for example, are taking steps to become “circular cities” by reducing domestic and commercial waste footprints and implementing measures to encourage reuse and recycling. Meanwhile, the London Waste and Recycling Board (LWARB) has announced to invest £50 million in its circular economy programme[19], which the London Assembly Environment Committee believes could reduce 60 per cent of the capital’s waste by 2041, put London “on track” to become carbon-neutral, create 12,000 new jobs by 2030 and provide £7 billion net benefit to London’s economy[20].

A flurry of commitments from UK councils to create low emissions zones and increase the charging infrastructure for electric vehicles followed the government’s announcement to ban all new petrol and diesel vehicles by 2040: London’s mayor, Sadiq Khan, introduced the world’s first ultra-low emission zone (ULEZ) in 2019, while Oxford will become the first place in the UK to have a Zero Emission Zone (ZEZ). The pilot, introduced in August this year, will see non-zero emission vehicles subject to charges in certain zones, between 07:00 and 19:00[21].

At the same time, cleaner transport is on the rise: the police, fire services and the NHS are all introducing electric vehicles to their fleets, while Leeds has pledged to invest £71 million in 284 new ultra-low emission buses and Arriva Merseyside has introduced 12 e-buses to its Liverpool routes after investing £21 million in greener fleets. In the UK’s capital, 68 fully electric double-decker buses create the largest fleet of its kind in Europe[22], while the Metropolitan Police is trialing hydrogen fuel cell scooters as patrol vehicles[23].

Finally, UK cities have started to encourage their citizens to switch to more sustainable modes of transport such as walking and cycling, which have proven to be particularly popular during the lockdowns throughout the COVID-19 pandemic. Pop-up cycle ways, wider sidewalks and cycle and bus-only streets are some of the instruments local authorities can get funding for out of a £250 million fund the UK’s transport minister, Grant Shapps, announced in May 2020, claiming that “if cycling increased by only 5% it would mean 8 million fewer car journeys, 9 million fewer rail journeys and 13 million fewer bus journeys.”[24]

With floods, storms and heatwaves increasingly disrupting communities and the UK economy, many public bodies are prioritising the improvement of built infrastructure in towns and cities, incorporating green infrastructure that enhances air quality, boosts quality of life, conserves wildlife and attracts visitors[25]. Equally, many councils and housing associations are delivering low-carbon and affordable social housing stock, while the roll-out of high-speed broadband internet along with the rise of the Internet of Things (IoT) has helped to design smart and connected infrastructure across cities, positioning the UK as a global leader in smart cities. The Foreign, Commonwealth & Development Office (FCDO) Smart Sustainable Cities project, for example, brings together selected European and UK cities to showcase best practice and provide opportunities for knowledge sharing and networking[26]. The UK has also fostered substantial new innovations in digital technologies such as IoT, AI, 5G, sensors and electronics systems, geospatial and blockchain, all of which underpin future smart city developments[27].

Finally, the UK’s public sector also sets an example for knowledge sharing and open innovation as can be seen in the multiple green networks and collaborations. Here are just a few:

  • UK100 is the network for UK locally elected leaders who have pledged to play their part in tackling climate change by switching to 100% clean energy by 2050[28]. 
  • The Countryside Climate Network (CCN) is made up of predominantly rural councils, currently representing over 40% of England’s land area[29], who are committed to achieve NetZero in their communities and to amplify the rural voice in national policy advocacy.
  • The Environmental Association for Universities and Colleges (EAUC) comprises higher and further educational institutions responsible for educating over 4.5 million students. It helps leaders, academics and other professionals to drive sustainability to the heart of their post-16 education institutions[30]. 
  • The Greener NHS programme works with NHS staff, hospitals and NHS partners, sharing ideas on how to reduce the impact on public health and the environment, save money and reach net carbon zero[31].
  • And, collaborations don’t stop at city borders: In May last year, Drax Group, Equinor and National Grid Ventures announced a new zero carbon partnership, which could lead to the Humber estuary becoming the world’s first net-zero carbon region and home to a new hydrogen economy[32].

Corporate UK: green momentum is accelerating

While the green corporate landscape might be fragmented, overall there is a clear message and belief: a green shift in business strategy can address a large majority of this era’s corporate challenges as well as improve business performance and competitiveness.

Some UK businesses are indeed much further ahead on their sustainability journey than others, in particular smaller businesses with fewer resources for climate adaptation (96% of private sector enterprises have fewer than 10 employees, accounting for 33% of employment and 18% of turnover[33]), haven’t even yet started their transition. However, “doing well by doing good” is making a strong business case for corporate environmental action, evidenced already by the UK’s economic growth by 72% since 1990 while reducing emissions by 42%[34].

And, ahead of COP26, which will take place in Glasgow in November this year, the green momentum across corporate UK is growing: by the end of March, 30 of the UK’s FTSE 100 companies, representing a total market capital of £650 billion, have signed up to the United Nation’s Race to Zero campaign – the largest ever global alliance committed to achieving net zero carbon emissions by 2050 at the latest, with many firms opting to go even faster[35].

To encourage businesses of all sizes to set out clear pathways to get to net zero, the UK government has set up Business Leaders Roundtables, chaired by COP President Alok Sharma, and has appointed a ‘Net Zero Business Champion’, Andrew Griffith, who will help the business community embrace green opportunities.

Huge potential but delivery needs to gain traction

As much as there is the belief that climate change mitigation also brings enormous business opportunities, experts agree that the UK is well positioned with its industry and research strength to capitalise on critical low carbon technologies such as low-carbon heating solutions, offshore wind, electric vehicles and demand-side management[36]. The UK’s share of clean energy patents was 11% in 2018, which was on average higher than in other G7 countries (7%).

In March, the government presented its biggest weapon in its green arsenal to turn corporate UK green: its Industrial Decarbonisation Strategy. With its publication, the country became the world’s first major economy to present an all-encompassing Net Zero Strategy which outlines how the country can have a thriving industrial sector aligned with the net zero target. The strategy covers the full range of UK industry sectors: metals and minerals, chemicals, food and drink, paper and pulp, ceramics, glass, oil refineries and less energy-intensive manufacturing. And, it not only lays out key building stones of the transition such as adopting low-regret technologies and building suitable infrastructure, improving efficiency and accelerating innovation of low carbon technologies but also shows the way forward for getting investors and consumers to choose low carbon[37].

However, a report from the Green Innovation Policy Commission (GIPC), a business-led Commission set up and supported by University College London (UCL) and UK think tank Green Alliance, points out that the UK, despite being well positioned globally in clean technologies such as offshore wind, marine energy and efficient aviation, hasn’t yet translated this innovation power into green innovation performance. The report states that despite a stable and relatively rapid growth of the UK’s low-carbon and renewable energy sectors, Britain has underinvested in R&D for energy and environment and has a patchy record in innovation in areas driving transition to net zero – the Eco-Innovation Index, which measures green innovation in the EU member states, ranked the UK ninth in 2019[38].

As mentioned earlier, UK businesses are moving at varying pace, which is unsurprising considering that each sector is affected differently. Therefore, let’s have a look at how some sectors are faring so far:

  • The Office for National Statistics (ONS) estimated the turnover in the UK low-carbon and renewable energy economy at £46.7 billion in 2018. ‘Energy efficient products’ was by far the biggest sector with £16.7 billion turnover and 114,400 employees. Other important areas included low-emission vehicles and infrastructure, bioenergy, nuclear energy and off-shore and onshore wind[39].
  • To drive uptake of renewables, the government has focused most support on the electricity sector, where good progress has already been achieved: in 2020, 42% of electricity was generated from renewables, overtaking fossil fuels as electricity source.[40]
  • The environmental goods and services (EGS) sector has grown significantly over recent years, contributing £42.2 billion to the UK economy in terms of gross value added (GVA) in 2018 and growing by 70% since 2010. This was the second highest value generated from EGS in the EU, second only to Germany.
  • The UK waste sector has considerably improved its performance over the last decades: its emissions have decreased by 73% since 1990, and the sector now contributes 14% of UK renewable electricity. This progress, although significant, falls short of the broader challenge to overhaul current unsustainable production and consumption systems and instead introduce a circular economy approach[41].
  • The country’s water industry became the first sector in the UK to commit to net- zero CO2 emissions by 2030[42]. It has already taken significant steps to reduce gross operational emissions, cutting them by 43% since 2011 despite a growing population and the impacts of climate change. Water companies have increased their own renewable electricity generation by over 40% in that time and have also changed the way they buy power. In addition, the industry has launched a number of schemes, which will have an impact on the industry’s carbon emissions, such as a national campaign to encourage the public to switch to refillable drinking water bottles rather than buying bottled water, which includes increasing the number of free refill stations from 1,500 in 2017 to around 28,000 in 2020. The sector has committed to preventing the equivalent of 4 billion plastic bottles ending up as waste by 2030.
  • The UK manufacturing sector shows a ‘green fragmentation’: 30% of manufacturers invested in energy efficiency measures in 2020 with 40% reporting an increase in profits as a result[43]. However, a recent survey amongst 1,021 SMEs in the UK manufacturing sector revealed that only 57% of those smaller businesses have a sustainability plan in place to help reduce carbon emissions, while 23% admitted to have not drawn up a net zero strategy yet and 30% said they have no plans to introduce one[44].
  • The UK’s food system, fragmented and heavily dependent on imports (Britain produces only 53% of food consumed in the UK), is undergoing a transformation accelerated by the COVID-19 pandemic with a focus on strengthening local food supply-chains and supporting supply chain partners in other countries with climate change mitigation[45].
  • Road transport is one of the largest contributors of greenhouse gas emissions and air pollution in the UK. While policy and public debate on greening transport has focused on personal mobility – electric cars, public transport and cycling – there has been little progress yet in reducing emissions from HGVs and vans, which account for 8% of total UK GHG emissions (BEIS, 2018).
  • Financial Services: The UK’s deep and liquid capital markets have led to UK banks financing green projects around the world, and the UK’s own Green Finance Strategy as well as the active participation of UK banks in the United Nations Principles for Responsible Investment (UNPRI) and UN Principles for Responsible Banking have publicly underlined the country’s commitment to drive the international finance community to align with the zero-carbon transition. However, so far, the UK ranks outside the top 15 countries in terms of green bond issuance, performing below expectations – a trend which the market expects to be reversed when the UK issues its first sovereign Green Bond (read more about the UK’s sustainable debt market in our third UK focus article).

In the second of our three UK focus articles of our Climate Change Virtual World Tour series we’ll be looking in further detail at the UK’s specific green challenges and opportunities.


[1] robeco.com: Sustainable-investing - country ranking

[2], [3] commonslibrary.parliament.uk: Coronavirus: Economic impact - House of Commons Library

[4] allenovery.com: Managing ESG compliance challenges for UK listed companies

[5] spglobal.com:The ESG lens on covid 19 part1

[6] greenallianceblog.org.uk: How post brexit law making is jeopardising the environment

[7], [8], [14] brexitenvironment.co.uk: Environmental regulation post-Brexit

[9] bbc.co.uk/news/uk-politics-55799191

[10] gov.uk: Evironment bill continues through Parliament

[11] whitecase.com: Environmental law after Brexit

[12] grantthornton.co.uk: Sustainable finance a guide to the EU taxonomy

[13] ec.europa.eu: Sustainable finance - EU taxonomy sustainable activities

[14], see [7]

[15] mckinsey.com: Starting at the source sustainability in supply chains

[16] lse.ac.uk: LSE Climate Risk Business Survey 2020 (PDF)

[17] ukclimaterisk.org: Technical Report The Third Climate Change Risk Assessment (PDF)

[18] sasb.org: Materiality map

[19] esgclarity.com: What are the material ESG risks in the UK equity market

[20] energy-transitions.org: ETC Mission Possible Report Summary English (PDF)

[21] https://www.ft.com: UK business leaders call for green coronavirus recovery plan

[22] gov.uk: PM commits 350 million to fuel green recovery

[23] gov.uk: The ten point plan for a green industrial revolution

[24] Environmental protection expenditure UK: 2017

[25] www.lse.ac.uk: Impacts of Environmental Regulations. (PDF)

[26] ftadviser.com: Royal London the DWP strikes back

[27] old.parliament.uk: Commons select environmental audit-committee

[28] nic.org.uk: What we do

[29] Green Finance Strategy Transforming Finance for a Greener Future July 2019

[31] greenfinanceinstitute.co.uk: about us

[32] wemeanbusinesscoalition.org

[33] ukcip.org.uk: about us

[34] nbn.org.uk: What we do

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top