By Fiona Reynolds (fireynolds), CEO, PRI
With the critical UN COP26 summit a few short days away, Australia’s intention to adopt a net zero objective is a welcome development and Prime Minister Scott Morrison deserves recognition for bringing his climate fractious coalition across to what is now the basic international marker of national climate commitment.
The recognition, however, ends here from the international investment community who are waiting for a credible short- and long-term plan from the Australian Government to address climate change. Importantly, this must include near-term accountability. A net zero by 2050 ‘target’ without any legislative backing does not signal either the ambition or policy certainty that international investors are seeking.
2030 targets and credibility
No change in the present 2030 national target, with its clouded method of calculation and low level of ambition does not inspire investor confidence that the Government understands or is responding to the significance now placed against 2030 emission reduction plans.
While it may seem churlish to be critical at this seeming climate watershed in a G20 nation, it’s best to be honest, no matter how painful. Australia has little international credibility left in the bank on climate policy, from questionable carry over credits around the 1997 Kyoto Protocol, to the passage then repeal of one of the world’s first economy wide carbon pricing mechanisms, to a decade of attempts to stall climate cooperation at COP and weaken efforts in other multilateral forums.
Even now, on the eve of COP26, the Australian Government has been identified as one of the most active in seeking to water down IPCC reports and perpetuate a role for coal in international energy generation.
This decade-long stance has been increasingly noted by international investors, placing Australia’s longer-term sovereign risk profile and cost of capital under the spotlight, as Treasurer Josh Frydenberg acknowledged in September.
Carbon pricing and coal
As the most emissions intensive OECD economy, Australia is highly exposed to decarbonisation directions in the global energy supply chain. It’s also unprepared for carbon border tariffs and the wider extension of carbon pricing schemes generally as advocated by a host of international bodies and investors.
Ongoing approval of new thermal coal developments and talk of Government funding for rail lines to open up new coalfields in Central Queensland reinforces the impression that Australia is deaf to warnings, including the latest from the IEA and most recently the Inevitable Policy Response which explains that gas and coal phase-outs must be accelerated from global energy systems if temperature increases are to be held at 1.5C. Astonishingly, Australia’s net zero plan actually states that it will export coal and gas after 2050.
Investors will back 2030 targets and transition
Globally, green investment opportunities and credible climate risk management have paved the way for greater net zero investments in global capital markets. However, without near-term emission reduction plans, Australian businesses will be competitively disadvantaged, through slow transition and business models that are more carbon intensive than competitors.
Australia’s asset owners and managers, overseeing a $AUD three trillion private pension system have repeatedly called for policy certainty and new partnerships with Government for investment in low carbon development paths and infrastructure.
Half of the collective ASX200 market capitalisation with over $1 trillion AUD are now covered by net zero commitments. And investors are increasingly capitalising on opportunities in a low carbon economy, investing in clean technologies and sectors looking to generate sustainable, risk-adjusted returns.
The scale and urgency of the challenge necessitates a new, ambitious partnership between investors, business and the Government. Investors need decisive and comprehensive climate policy, and the Government needs continued international and domestic investors’ support in providing private capital at globally competitive rates to fund investment, ongoing lending and the climate transition.
We need to see the Government:
1. Set a stronger, Paris-aligned emission reduction target by at least 50% by 2030, from the 2005 baseline, in line with other advanced economies. Nationally, the growing gap between Australia’s 2030 climate targets and that of the Paris-aligned global momentum, will remain a concern for institutional investors until national ambition ramps up.
2. In addition to the net zero by 2050 announcement, set clear transition policies for key sectors of the economy. An end to coal fired power, decarbonisation of industrial, transport and power sectors via clean energy, an end to land clearing and commitment to re-forestation.
3. Commit to phasing in internationally consistent mandatory TCFD-aligned disclosure requirements in Australia by 2024, with ASX300 companies reporting by 2023. High-quality disclosures about how firms and assets will be impacted – and impact – environmental change will improve transparency, comparability and reliability of data and metrics for risk assessment and encourage more efficient capital allocation.
Capital costs and climate
Australia faces a more climate aware and sophisticated global market. Climate policy is increasingly being embedded in global trade and economic relations. Delays in action, pinning emissions reductions on post-2030 as yet unrealised and costly ‘new technologies’ and continuing reliance on coal and gas will only reinforce investor concerns of longer-term volatility, structural economic risks and higher subsequent adjustment costs.
Unless Australia moves to match comparable global ambition and mitigate climate risks with clear near-term policy actions and signals, it will ultimately find itself less competitive in global capital markets. International policymaking and investor preferences are accelerating in only one direction.
In the eyes of many investors, announcing a net zero target is the first step on a long road. It’s worth a big cheer but hold back the beers for now.
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