The key to meeting sustainability goals, including Australia’s orderly transition to net zero emissions, is a well-developed and inclusive transition plan that ensures business models can continue and evolve for the future, and considers both the social and economic impacts of these changes. Many stakeholders and communities are already committed to the environmental imperatives for a more sustainable approach, particularly around energy, but also need to have a solid understanding of the potential gains and risks on the road towards these shifts. Understanding the goals, planning process and potential risks will help inform community debate and support through long-term, constructive and transparent dialogue.
In Australia, many large investors, including super funds, have made commitments to invest responsibly and for the long term, with the Responsible Investment Association of Australasia (RIAA) representing over 350 members managing more than $9 trillion in assets globally. Responsible investing levels here are the highest globally at 65 per cent of assets under management, compared with 50 per cent in Europe, according to RIAA, with a substantial shift towards active ownership and stewardship of assets in recent years. Indeed, the commitment to address climate change goes further, with many super funds making net zero 2050 commitments and actively participating in bodies such as the Climate League 2030 and Climate Action 100+.
Heading off transition risks
Being unprepared, or inadequately prepared, poses the largest risk to meeting our sustainability objectives.
It’s clear that continuing to transition towards a low-carbon economy is no longer a matter of choice. The current decade is a critical one for the transition. Global investment in the low-carbon energy transition rose to $501 billion in 2020, including investment in projects such as renewable power, energy storage and hydrogen projects, according to BloombergNEF (BNEF). Increasingly, our global regulators are directing the financial system to be prepared to support transition. Most recently, APRA released draft guidelines for banks and super funds urging them to measure and manage climate risks, financial risks as well as litigation risks.
How effectively Australian business and households use current resources in the face of global warming, the timing of the shift to sustainable energy sources and misalignment of activities across finance, industry and global partners all pose potential risks to a smooth transition. Add to that the social risk that comes from disrupting established economic models and local communities, and the need for a real transition plan to help these communities.
The global pandemic has amplified concerns about job losses, lower living standards and disenfranchised communities (and even generations). While governments are keenly focused on what communities expect in terms of timing and outcomes from a transition to a low carbon economy, it cannot be ignored that somewhere along the way, some parts of society will be perceived as losing. The risk of not meeting community values and expectations around this transition and how those people whose lives are impacted by the change are supported, both in Australia and overseas cannot be underestimated. These considerations form part of the ‘just transition’, which aims to support those directly affected by the structural adjustments to a low-carbon economy.
Creating opportunities for early and inclusive dialogue among all stakeholders is critical to identifying and widening perspectives on how transition occurs. Transition to reliable, affordable, low-emission energy sources for industrial and domestic use will happen, but how this happens will impact success and write the legacy for future generations.
Many corporates are developing and managing transition plans for industry which are designed to meet the Paris Agreement targets, as well as educating consumers and the general public about the steps towards transition. Fortescue Metals for example has pledged to achieve carbon neutrality by 2030, ten years ahead of its previous plans, and aims to develop up to 235GW of renewable energy including solar to aid in the production of green hydrogen and green ammonia for export. In the funds industry, IFM Investors is an example of the increasing list of funds which have pledged to be target net zero carbon emissions by 2050. In addition, they are positioning their infrastructure assets to take advantage and adapt to the new low carbon economy.
Public expectations around timing for transition and the role of federal and state governments, industry and consumers to achieve our clean energy ambitions are important. Aligning the move towards use of sustainable energy sources and more sustainable practices in both business and among households is a shared responsibility.
Hand in hand with transition plans is the need for more efficiency and lower cost in the generation, storage and delivery of clean energy over time. There is no shortage of investor interest in supporting these activities, with $303 billion invested in new renewable energy projects last year despite the pandemic, according to BNEF. The Federal Government has put technology at the centre of its clean energy transition plan through the Technology Investment Roadmap, which is expected to guide $18 billion of Government investment over the next decade and drive at least $70 billion of total new investment in low emissions technologies in Australia by 2030.
Consideration is also needed to ensure sustainable energy technology and materials that Australia exports is well-supported during and after transition.
Sustainable finance – fuelling Australia’s transition
Green bonds, social bonds and sustainability bonds are now well-established instruments in the fast-growing sustainable debt market. They’ve been an important first step in helping to bring wider understanding and acceptance of sustainability transition and have paved the way for other newer products such as sustainability-linked loans. Last month, National Australia Bank led the development of a landmark loan for Port of Newcastle that aligns financing with long-term environmentally and socially responsible outcomes. The arrangement includes A$515 million in sustainability-linked loans that incentivises Port of Newcastle by offering a lower margin on debt if it hits targets across a range of social and environmental metrics.
Banks, large institutional investors such as super funds and large corporate borrowers around the world are working closely together to help unlock a more sustainable future. Consumers, retail investors and super fund members also expect that their funds will be ethically and sustainably invested, and the finance industry and large investors have a clear responsibility here to ensure that this is well communicated.
Challenges and opportunities
While companies are heavily focused on understanding how and where they can reduce Scope 1 and Scope 2 (that is, direct emissions and consumption), there is also a significant challenge in accessing data including understanding and influencing Scope 3 emissions.
There are already advantages to act now, with a swell of investor capital available to companies positioned for transition to zero carbon. A study by the NY Stern Centre for Sustainable Business based on over 1,000 research papers found a positive relationship between high ESG credentials and corporate financial performance. These companies may also expect advantages such as an improved cost of capital. For investors, asset owner demand has been the number one driver of ESG adoption by asset managers.
Erik Solheim, the Head of UN Environment, has commented on the need for a clear roadmap towards a low-carbon, sustainable future and the incredible transformative power of the finance industry (including large investors) to maintain the momentum towards a smooth transition. As increasing amounts of capital and investment are channelled towards sustainable and socially responsible growth, staying on the right path may be challenging at times, but will ultimately mean we arrive safely and with confidence into a sustainable future.