This is positive for Australia as a net exporter of commodities and a country rich with natural resources. As a result, we believe that despite the potentially negative impact of climate change policies on dominant sectors such as coal and iron ore, the outlook is relatively positive for Australian equities. Australia is also well-placed to develop a range of renewable energy sources.
While Australia has been slow in supporting these industries to date, the new government has committed to high renewable energy targets and support for these technologies is probable. We believe the outlook for this sector is relatively positive. The impact on equities globally will differ between sectors and geographies. Emerging market countries tend to be highly exposed both physically and economically to climate change. The economic impact will vary depending on global climate change policies and the price of resources such as coal and iron ore.
Europe has been addressing the energy and related issues for a number of years and is arguably better placed to deal with the negative economic impacts of climate change, than say the US, over the coming years. The impact of climate change will depend on the response by companies to climate change and specific regulation and policies. Simply because a company or a sector is a high emitter of GHGs, it does not necessarily follow that the company will be negatively impacted by climate change policies and regulation. The impact of climate change and climate change policy is not straightforward and is, to a large extent, likely to be company specific.
Globally, the impact of carbon trading on lowering emissions has been relatively benign to date. That is not to say this will be the case in the future and it is imperative that fund managers assess this, and other climate change related risks, on a case by case basis although including these aspects into a valuation process is challenging. Overall, Frontier believes it is important that funds managers are considering issues such as climate change, policies and carbon pricing when assessing companies. Superannuation funds need to determine the process fund managers use to price potential risks of climate change and how possible opportunities are sourced.
Infrastructure, by definition, exists to support the social and economic activities of society. When these activities change, the impact can be quite significant, both positively and negatively. Positively there may be opportunities to invest in renewable energy assets, natural gas distribution networks, transport infrastructure and other climate-friendly infrastructure assets. In addition, this sector has traditionally been viewed as a solid inflation hedge given a sizeable amount of the revenue is pegged to inflation.