Labour drops green investment plans in favour of fiscal discipline

The UK Labour party has pledged to invest £5bn a year in green investments, a paltry sum compared with its previous promise of £28bn

The UK government’s main opposition party is under fire for ditching a pledge to invest £28bn annually in green energy. Instead, Labour leader Sir Keir Starmer has announced that his party, if elected to lead the UK in the next general election, would spend £24bn over the entire next parliament, equivalent to just under £5bn a year. 

The Labour party had committed the £28bn as part of its “green prosperity plan”, which reads: “To not invest in the future of our prosperity and security would be reckless and irresponsible.”

The figure had been the subject of regular attacks by Conservative politicians in a co-ordinated attempt to undermine voters’ confidence in Labour’s handling of the economy, and the subject of internal wrangling within the Labour party between MPs wanting to ramp up climate action at all cost and those focused on keeping a tight grip on UK spending. Shadow chancellor Rachel Reeves has pledged to manage the country’s finances in line with strict fiscal discipline if her party gains power. 

After weeks of speculation, Labour announced on February 8 that it was abandoning the headline figure commitment, though it insisted that bar cuts to its Warm Homes Plan, the majority of its aims and policies would remain the same. 

The party pledged that under its leadership, the UK would have a zero-carbon electricity system by 2030 and its plans for Great British Energy, a publicly owned energy company to invest in domestic clean energy, remain on the table.

To finance the transition, Labour is proposing a National Wealth Fund to invest in UK industries, a jobs bonus “to crowd private investment into Britain’s industrial heartlands”,  and a windfall tax on oil and gas giants.

Starmer blamed the incumbent Conservative government for its change of plans, saying it had “crashed the economy” and citing plans by chancellor Jeremy Hunt to “‘max out’ the country’s credit card”.

Liabilities versus assets

Labour’s pivot has been widely criticised.

“Economically illiterate. Environmentally irresponsible. Politically naïve,” stated Barry Gardiner, Labour’s former shadow environment secretary on X. “This is the sad truth about the £28bn U-turn The US has shown a green prosperity plan is the way to grow the economy, reduce the share of debt to GDP. And get people excited about a cleaner, safer future.”

Sebastian Peck, founder of the venture capital firm Kompas, made a similar comparison between Labour’s “regrettable” decision, highlighting that £28bn represented only “a little more than 2 per cent of annual government expenditure”, and the US Inflation Reduction Act.

The IRA has demonstrated that “well-designed government initiatives can result in major investment in renewable energy and zero-emission technologies, and in job creation and the sustainable transformation of entire economies,” he added. “Texas, famed for its oil industry, is one of the largest producers of renewables. It generates more megawatts of wind power than any other US state and trails only California in utility scale solar projects. In light of such developments, Labour’s climb down seems incredibly short-sighted.”

Economically illiterate. Environmentally irresponsible. Politically naïve. This is the sad truth about the £28bn U-turn

The decision “sends yet another negative signal to potential investors eyeing opportunities in the UK”, Ed Heaven, head of sustainable investments at Montanaro Asset Management, told Sustainable Views. “The prevailing sentiment surrounding the UK is already concerning, and this development exacerbates the issue. While £28bn is a small amount in the context of global financial markets, the persistent backdrop of uncertain and fluctuating policies dissuades investors from contributing the capital necessary to address the UK’s environmental and societal challenges.”

James Spooner, head of mergers and acquisitions at renewable energy investor Korkia, gave a similar analysis: “It’s imperative that the decarbonisation sector in the UK has clarity and stability in government support and regulation. This unfortunately is another example of the uncertainty we have seen over the last few years, which has the risk of damaging investor confidence.”

François Gemenne, a lead author of the Intergovernmental Panel on Climate Change’s sixth assessment report published in 2023, said bluntly: “This is a terrible, terrible signal that Labour is sending to investors.”

He added: “The more we hesitate [and] make U-turns and zigzags and flip-flopping on these commitments to invest, the more investors will be scared and reluctant.”

Oxford Sustainable Finance Group founding director Ben Caldecott suggested there was a “structural problem in British politics”.

“The country has a balance sheet and if policymakers only look at the liability side and ignore the assets, then perennially poor decisions are inevitable from whoever is in charge,” he said.

Meanwhile, Labour Climate and Environment Forum director Paul McNamee underlined the importance of the GPP as an industrial, as much as a climate, policy. “Labour needs to speak about the GPP for what it is: an industrial strategy designed to address the long-term issues that the UK faces – kick-starting stagnating growth, addressing regional inequalities, and providing energy independence in an increasingly volatile world,” he told Sustainable Views.

Donal Brown, director of UK programmes at climate solutions charity Ashden, also rued what he saw as a lack of understanding of the wider benefits of investing in climate action. “A proper programme for insulating homes could save £24bn off our energy bills by 2030, as well as employing thousands of people across the UK and skilling up our new generation of builders and installers,” he said. “Something that surely makes political and economic sense?”

‘The real prize’

Some sustainable finance and clean energy experts have, however, urged their peers to look beyond the headline figures and focus instead on actual policies and what is happening in the private sector, which ultimately will have to provide the lion’s share of the financing for the energy transition. 

“The furore about Labour’s commitment on £28bn of public investment has very quickly become a distraction, when the real prize is to attract hundreds of billions in private capital,” said James Alexander, chief executive of the UK Sustainable Investment and Finance Association.

“Public funding, of course, makes a difference, but policymakers must remain clear-eyed about the much greater quantity of private capital available to help the UK reach net zero,” he added.

“Although the £28bn was useful to provide clarity on the direction of travel a Labour government would take, there are other ways to provide policy certainty to business and investors — and it is now even more important that Labour does this,” Ryan Jude, programme director at the UK-based research organisation Green Finance Institute, told Sustainable Views. “The fundamentals — growing our green economy and mobilising private capital alongside public investment — have not changed.”

Keith McGrane, chief executive of energy storage developer Corre Energy, insisted that clean energy companies would require “several sources of capital to help the UK reach its net zero ambitions”.