Asset owners and managers are placing a lot of faith in the sectoral decarbonisation plans the Australian government has promised to deliver.
A recurring message during the Investor Group on Climate Change’s two-day IGCC Summit 2023 held in Sydney this week was how heavily investors would be relying on the decarbonisation pathways being developed by the Climate Change Authority as part of the government’s six plans.
The IGCC has been a strong advocate for pathways hoping they will provide a clear framework for asset owners and their investees by guiding the allocation of capital towards climate solutions and infrastructure; giving clarity on climate-related financial disclosures; helping companies with their transition plans; and enabling asset owners to more confidently and meaningfully engage with investees.
Asset owners view the decarbonisation pathways as a key component of an essential package of support – that includes developing an Australian sustainable finance taxonomy – that will be offered by the Government’s new sustainable finance architecture.
Rest CEO Vicki Doyle told the summit that “sector pathways are the practical way to go” and “taxonomies will ensure companies act in the right way”. Doyle said these initiatives will give “confidence to asset owners” and “help us invest”.
Doyle said the “climate change conversation had changed quite dramatically” and it was now “about transition with a capital T”. The conversation was not just about what asset owners invest in but also the how. Doyle said this included engaging with investees and advocating for practical transition plans. The challenge is how do we communicate “the concrete tangible actions that need to be taken now,” she said.
Daniela Jaramillo, Head of Sustainable Investing Australia at Fidelity, said “the sector pathways should look at the business model of the country”. The Australian economy is very carbon intensive so “we need to decarbonise our trade exposure”.
The pathways were an opportunity for Australia to focus on those industries where we have a comparative advantage in a net zero world. Jaramillo said we didn’t want to decarbonise but then “have a weak economy”. Opportunities here included renewable energy, critical minerals, green steel and green hydrogen.
When asked about her vision for 2035, Jaramillo said it was to “get “to a place where we have a healthy, greener listed market in Australia,” noting that the ASX currently doesn’t offer “much access to companies taking advantage of climate change opportunities”.
Kate Turner, global head of responsible investment at First Sentier Investors, said “what is really important for us is leaning into policy advocacy”. She said now was “first time we can do it constructively for a long-time”. On the pathways, Turner said “certainty from government helps asset owners engage with investors”.
Renewables push losing momentum
However, despite all the positive talk there were also some alarm bells.
Anna Freeman, policy Director for decarbonisation at the Clean Energy Council (CEC), revealed that no large-scale renewable projects were committed to in the first quarter of 2023 – and that only four projects reached financial commitment in the second quarter.
This stalling of the project pipeline means we are a long way off the pace necessary for Australia to achieve an 82 per cent renewable energy share by 2030, according to the CEC. Chronic under investment in the grid; a 30-40 per cent blow-out in project costs; and the scheduled sunsetting of the RET scheme in 2030 were fuelling investor uncertainty.
Earlier at the Summit, Damian Graham, chief investment officer at Aware Super, admitted the group had “paused a bit on large-scale renewable energy”. Graham said there were challenges about offtake agreements that Aware needed to be better understand to “help make us more aspirational”.
Greenwash seems to be a mandatory discussion topic when asset owners and managers meet. Claire LaBouchardiere, senior executive at ASIC, took the opportunity to repeat the regulator’s fairly straight forward advice to avoid making claims that are “vague” or don’t have a reasonable basis. Investors and investees should ask themselves are their claims “true and can be substantiated,” she said.
On ‘greenhushing’ – where entities stay silent for fear of regulator action or stakeholder criticism, LaBouchardiere said “staying silent was an increasingly risky position” to take given the growing demand for information and disclosure.
Daisy Mallett, principal at Mallet Services, talked about the “next frontier” of greenwashing claims. Mallett said these included “greenwashing by association”, where investors rely on investee claims that they haven’t properly interrogated; and “transition washing” where asset owners need to ensure funding is going to transition activities that are aligned with taxonomies and/or are Paris-aligned.
Road to Resilience
At the Summit IGCC launched its Road to Resilience investor action plan.
IGCC CEO Rebecca Mikula-Wright said the action plan “will be an accelerant. It will help investors get up to speed on the least-understood risk in the economy”. Mikula-Wright said asset owners “cannot divest from climate risk. This strategy is designed for the real, system-wide adjustments that will make sure we’re not divesting, we’re investing in a climate resilient economy.”
The plan notes that investors, companies and communities are already suffering the impacts of physical risk. However, in IGCC’s Net-Zero Survey 2023, just 22% of investors have assessed physical risk across their whole portfolio (compared to 43% for transition risk), with only 9% having implemented a response to their physical risk exposure.
IGCC’s plan aims to guide asset owners and managers “as they navigate systemic physical climate risk, with a focus on driving urgent, adaptive and resilience-building actions”.
The just-released Intergenerational Report projects for coming decades the huge economic cost of climate change to Australia; the huge private sector investment needed for a successful net zero transition; and the huge growth in our country’s superannuation assets. The challenge – and opportunity – being presented here for IGCC members, and for all asset owners, is clear.