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The UK became the first major global economy to commit to net zero in 2019, setting a legally binding target by 2050.
Since then, the tenor of the discussion surrounding the UK’s net zero aspirations has shifted, from a policy initially met with widespread political and public approval, to a subject of increasingly polarised debate. Much of this shift has been the result of geopolitical turbulence, which has prompted a reassessment of political priorities.
For investors, this has left many with the unsavoury prospect of grappling with a lack of policy certainty, on top of the existing challenges surrounding regulatory complexity and the evaluation of risk-return dynamics on net zero investments.
The path to net zero in the UK is also far from straightforward, with question marks around infrastructure capacity highlighting the need for extensive capital allocation and commitment from the private sector to make net zero a reality.
For stakeholders in the insurance sector, who have to manage the balance between exposure and return, this can make net zero investment an uncertain proposition.
“We need the capital to go at scale into opportunities
like hydrogen and carbon capture and storage.”
Against this uneasy backdrop, one might be forgiven for thinking institutional investors would prefer to steer clear of net zero investments. However, nearly half of UK respondents to a recent Schroder’s Capital survey claim to have made a commitment to reach net zero on their portfolios by 2050. Almost 40% cite the possibility of alpha returns on investments and the value of diversification as reasons for allocating investment to the energy transition.
In the UK, local elections have tested the Labour Party’s resolve on net zero in recent weeks, but the scale of the party’s current commitments and ambition has played a major role in helping drive institutional interest in net zero investment.
Wind and solar are relatively established investment propositions that deliver steady returns with relatively low risk. However, the UK’s net zero aspirations rest on casting a much wider net, which requires extensive private capital and, with it, the prospect of return.
“There is definitely a conundrum,” said Maria Nazarova-Doyle, Head of Sustainable Investment at IFM Investors. “We need the capital to go at scale into other opportunities like hydrogen and carbon capture and storage, but those opportunities are often not quite investment grade.”
Thankfully, this is where the government’s proposed Great British Energy (GB Energy) initiative and the National Wealth Fund is expected to help. The hope is these organisations can de-risk early-stage projects by providing guarantees against initial losses and leveraging public-private partnerships to make assets operational and sectoral business models viable. But, given the importance of policy certainty for institutional investors in the insurance space, Nazarova-Doyle warned of the need for stronger collaboration between the financial sector and the government, potentially on a case-by-case basis, to catalyse investment. “There’s a need for the financial sector to really understand the high-level plan for transitioning the economy and what this means for individual sectors, the sectoral pathways of transition, financing and the expectations surrounding the technology used to deliver those pathways,” she said.
Concerted and productive dialogue takes on an even more pivotal role in the context of UK grid connection reform, which aims to fast-track connections to the grid for new energy projects and slash the up to 15-year waiting period for connection. Published in April 2025 and led by the National Energy System Operator (NESO), the reforms will operate a ‘first-ready, first-needed, first-connected’ model that emphasises project readiness and necessity over order of application. Sarah Lane, Managing Director at Denham Sustainable Infrastructure, believes this will help investors to make more informed investment decisions. “From a developer perspective, this could take GWs out of pipeline assets. However, from an investor perspective, it should become easier to identify real projects and pipelines,” she said.
“The challenge surrounding the approach being taken by the UK government
is whether they are biting off more than they can chew."
Market pricing reform is also under consideration, as part of the Review of Electricity Market Arrangements (REMA) programme, launched in April 2022. Reforms to national pricing structures and zonal pricing are both being considered as part of a package of wholesale market reforms, with the government steadfast in its assertion that failing to change the pricing structure will not be considered an option. While these reforms are considered necessary, Chris Twomey, Partner/Chief Operating Officer and Head of Asset Management at Sosteneo (part of Generali Investments), expressed concern over the scale and speed of the projected changes.
“The challenge surrounding the approach being taken by the UK government is whether they are biting off more than they can chew, and whether the lowering of the political/country risk is being offset by the increased regulatory risk of too many reforms being undertaken at once,” he said. “We have seen plenty of situations where governments may have the desire to affect a lot of change, but the realities of increasing risk through announcing but not detailing reforms, combined with the realities of supply chains and fundamentals on capacity for key organisations, leaves promises undelivered.”
Under-delivering on investment potential is a risky outcome given the scarcity of capital and the fact that the UK is not the only jurisdiction appealing to international capital to help it realise its climate ambitions. Given the scale of competition for capital, the UK government needs to balance ambition with reassurance for an investor community that is often somewhat nervous around change. “Capital is scarce and will tend to go to where it's easiest and where there is the best risk-return profile. We're excited about what's happening in the UK, but it's a balancing act for all governments. How do you do enough without doing too much?” said Twomey.
Going too far, too fast is not the only possible issue. Investors are aware of capacity constraints on the UK’s current grid infrastructure and the potential for grid instability. “Existing grids were built for traditional fossil fuel power plants and struggle to handle the intermittent nature of renewables,” said Sabine Chalopin, Head of Sustainability at Denham Sustainable Infrastructure. This view is echoed by Twomey, who argues in favour of building out a “network that is able to support intermittent power and, secondly, storage capability that is able to provide flexibility and frequency regulation.”
The infrastructure constraints are pushing investors towards specific renewable asset classes. The nature of grid connection reform will likely result in greater interest in assets that can promise near-term grid access, potentially putting them at a premium. Chalopin believes some investors may choose to explore “private wire” deals, in which direct connections are made between a renewable energy provider and a consumer, allowing them to bypass traditional grid infrastructure and associated costs, and avoid lengthy interconnect queues. “These savings are shared between the generator and the consumer and as an investment opportunity, they can generate attractive returns,” she said.
“More rigorous environmental reporting on existing
energy assets does cause us concern."
Investor interest in grid-related assets, often considered a sub-asset class, is also likely to increase. “Investor focus is shifting toward integration assets - such as battery storage and grid infrastructure – to support renewables in systems historically designed for centralised fossil fuel-based generation,” said Twomey. As battery storage becomes an increasingly important enabler of a renewables-based energy grid, interest in battery energy storage systems (BESSs) is expected to surge, with a mix of revenue mechanisms used to guarantee yield. “The revenue stack for BESS is evolving from merchant revenue streams to contracted revenue streams from BESS projects coming from either flooring arrangements or tolling agreements,” said Chalopin. Both the floor price and tolling arrangements are likely to offer insurance investors a combination of revenue stability and risk mitigation, with the former offering some limited upside potential.
On the regulatory front, initiatives such as the SFDR and the EU Taxonomy are considered to be complex but positive developments that advance transparency and comparability across the market. However, more rigorous future reporting standards, while welcome, could cause problems if enacted retrospectively on existing net zero projects, potentially holding back progress. “More rigorous environmental reporting on existing energy assets does cause us concern, in that some of these things may be retrospective or have impact on existing planning approvals,” said Twomey. The government is unlikely to cut across existing planning approvals but monitoring the possible impact of the new reporting regulation on existing and future plans will require some consideration.
Institutional investor interest in the net zero sector is high, and most appear to be emboldened and enthused by the moves taken by the incumbent government to improve grid infrastructure and push through with reforms aimed at streamlining investment. What institutional capital needs most now, Twomey believes, is “well-structured offtake frameworks, predictable regulatory environments and trusted delivery partners.” Nazarova-Doyle agreed, outlining how it is often a case of institutional funding “sitting and waiting for the right policy settings and opportunities.”
“Over the last 12-18 months, we have seen quite a large gap open up
between mainland Europe and the UK in terms of cost of debt."
The phrase “unlocking capital” is an oft-mentioned phrase when discussing how best to remove structural impediments to growth, but Twomey believes lack of capital is not the main issue at play. Instead, he claimed the primary consideration was “access to investable, bankable projects at the scale and maturity institutional investors require,” together with “long-term market frameworks and accelerated permitting to bring more projects to financial close.” Chalopin concurred, arguing the choke points were to be found at the “project development stage, in areas such grid interconnection, permitting and supply chain.” Instead, she argued, “the challenge for UK institutional capital is the voracious appetite of European commercial banks for green assets that take the lion share of the market at terms not attractive for institutional capital.”
At the macro level, the UK must also strive to provide a stable monetary policy environment. The Bank of England has reduced the base rate four times in the past 12 months, with the most recent cut to 4.25% decided at its May 2025 meeting. Further easing is expected in response to ongoing global trade tensions, but the cost of debt compared with mainland Europe has widened, which could dampen the sector’s growth prospects. “Over the last 12-18 months, we have seen quite a large gap open up between mainland Europe and the UK in terms of cost of debt, which can have a major impact on the profitability of an asset,” said Twomey.
Threats to the UK’s net zero aspirations are numerous, from the unpredictable nature of the global trading environment to growing dissent among certain political factions regarding the relevance and priority given to net zero targets. What is increasingly clear, however, is that investors are ready and willing to devote capital to an area they see as both necessary and lucrative. In March 2025, Trevor Hutchings, Chief Executive of the Renewable Energy Association (REA), said that "net zero isn’t just an environmental necessity, it’s an economic opportunity and a national security priority.”
According to Nazarova-Doyle, UK asset owners are “some of the most progressive, setting the scene and tone, and often leading global initiatives.”
To bring the capital the UK’s net zero programme so desperately needs will require more than hunger from institutional investors; the government must play its part in engaging more deeply with investors, as it seems to provide the regulatory stability, clarity and scalability that will help the UK usher in a new era of clean energy.
