Australia experiences significantly lower energy costs than virtually any other developed nation due to the supply and proximity of natural resources. The predicted increase in energy costs is one factor that will influence inflation. Renewable energy, for example wind, is around double the price of coal and gas is around 20 per cent more expensive than coal. In order to control inflation, there will be upward pressure on interest rates, putting increased pressure on the economy, with consumer confidence and disposable income declining further. Having noted all this, what does this mean for institutional investors?
The uncertainty surrounding future regulation on climate change and related issues in Australia has made it difficult for investors and companies to value the impact of climate change. Regulation has the scope to increase costs or to drive new product opportunities, reduce or increase the size of existing markets, create new markets or render some markets or products obsolete. Technology shifts driven by government policy could lead to significant changes in markets which could be positive for some firms and industries while negative for others.
Looking forward, there is a significant degree of uncertainty for superannuation funds as to the opportunities and risks from an investment perspective. To capture some of these opportunities, numerous climate change funds have been and will continue to be launched with investments that range from a portfolio of climate change-aware companies to infrastructure assets such as waste management and renewable energy assets. It is a difficult task for investors to discern between funds and some of these types of vehicles will lack strong investment fundamentals and may fail to meet investor expectations over the longer term.
It is important not to get caught up in the opportunistic side of this issue, that is, the proliferation of products will make it important for due diligence to be undertaken to uncover the ones that will both make money for investors and meet the climate change imperative. For the remainder of this article, we try to flesh out some of the opportunities, and risks, by asset class, or climate change innovation (in the case of the emerging carbon market) as they stand for Australian superannuation investors.
The Carbon Market
The carbon market refers to a market in which various forms of carbon credits are traded. Carbon trading is often viewed as a preferred method of reducing emissions compared with a direct carbon tax or direct regulation, although this is yet to be proven. Carbon trading can be cheaper and politically preferable due to the grandfathering process. The potential issues with a carbon trading scheme are problems of complexity, monitoring, enforcement and sometimes disputes or inefficiencies regarding the initial allocation methods.