Climate on the up Down Under
Industry pundits make the case for why Australia is on its way to becoming a climate leader.
If one thing is clear by now when it comes to the climate crisis, it’s that investors cannot solve it on their own. Policies, regulations and wider laws are among the many elements that set the path and guide them on their journey to net zero.
As Udo Riese, ESG Lead at Allianz Investment Management, said last week as part of a call from the Net Zero Asset Owner Alliance (NZAOA) for governments to align with climate science: “Whenever countries introduce and implement a positive environment for transitioning to low-carbon, […] increased private investment will immediately follow.”
For many years, Australia has been considered a climate laggard on the international stage, often appearing near the bottom of global rankings. Its greenhouse gas (GHG) emissions reached 467 million tonnes in the year running up to June 2023 – four million tonnes above 2022 figures.
Between 2019 and 2022, climate activists across the country became disheartened by the weaponisation of climate action under Scott Morrison’s government. Yet, Oceania is already exposed to several climate-related risks, spanning water security, agricultural stability and economic resilience – to name but a few.
“Climate change represents a first-order risk to the Australian economy, the financial system and investors,” Louise Davidson, CEO of the Australian Council of Superannuation Investors (ACSI), tells ESG Investor. “Investors want to see climate policy that supports the management of [associated] risks by driving real-world emissions reduction, supporting a just transition of community and workforces, and preparing for the physical impacts of a changing climate.”
But new hope for climate action in Australia has seemingly emerged under the lead of Anthony Albanese, elected Prime Minster in May 2022. What followed was a reassuring rush of climate-focused policies and legislation – but more progress is needed.
One of Albanese’s government’s first climate actions was a legally binding commitment to cut emissions by 43% by the end of the decade and reach net zero by 2050.
Thanks to this, investors are more reassured by the country’s direction of travel. In March, the Investor Group on Climate Change (IGCC) published the results of an annual survey of its members, who collectively manage A$37 trillion (US$23.7 trillion) in assets. When asked to identify barriers to climate solutions-focused investments in Australia, 40% cited policy and regulatory uncertainty – a decrease from 70% the previous year.
However, ensuring that Australia gets to net zero by 2050 doesn’t come cheap – meaning private investment is essential. Research on this suggests the country will require A$754 billion of investment in renewable energy between now and 2050.
“If Australia doesn’t get this right, the costs now and into the future will be significant,” says David Whiteley, Global Head of External Relations at IFM Investors.
Playing catch-up
From the offset, the Albanese administration has worked to bolster existing climate-focused regulations, including in the form of changes to the safeguard mechanism that came into effect last year.
The mechanism mandates Australian companies producing more than 100,000 tonnes of GHG annually to keep those emissions below a prescribed limit, which is lowered by 4.9% every year. This aims to ensure an aggregate abatement of around 170 million tonnes of CO2 equivalent by 2030.
As of 2021, 212 companies fell under the safeguard mechanism, collectively contributing 28% of the country’s overall GHG emissions.
For hard-to-abate sectors, the Labor government has encouraged the use of carbon credits to offset emissions above the cap, prompting opposition from political leaders alongside climate activists, who questioned the integrity of carbon markets.
However, Australia’s delayed entry into the sustainable finance policy arena has meant that a slew of new climate-focused initiatives – all geared towards providing investors and companies through increased certainty and transparency – are still in the queue.
“A balanced approach [to policy] is crucial, avoiding excessive regulatory burden while incentivising capital flow into sustainable initiatives,” says Nayanisha Samarakoon, Head of Policy and Advocacy at the Responsible Investment Association Australasia (RIAA).
In November last year, the government published a paper outlining its sustainability-focused policy priorities, such as legislating a labelling regime for investment products marketed as “sustainable” or similar.
It also included plans for a sustainable finance taxonomy to categorise viable economic activities for investors, which is being developed by the Australian Sustainable Finance Institute (ASFI). The draft proposal – currently subject to a six-month consultation – treats green and transition economic activities for climate mitigation separately.
In January, the government also published draft legislation for mandatory climate-related reporting, based on the Australian Accounting Standards Board’s (AASB) proposed standards.
The AASB drew on the work of the IFRS Foundation’s International Sustainability Standards Board (ISSB), but diverged on Scope 3 emissions disclosures and reporting requirements for companies that don’t present material climate-related financial risks or opportunities.
Under the new rules, qualifying companies will be mandated to report on material climate-related risks, opportunities, metrics and targets across Scopes 1-3 emissions as of 1 July, while smaller companies will start in July 2026.
On Scope 3 reporting, a phased-in approach will also give companies an additional year before making disclosures.
But for Samarakoon, the divergence from the ISSB coupled with the absence of similar requirements for managed funds highlights the need for increased alignment with the rest of the world – if Australia is to attract any private sustainable investment.
“These standards focus narrowly on climate reporting, diverging from broader trends,” she notes. “We also lack transparency in Australia’s superannuation fund disclosure requirements, as [they] do not mandate a full look through to underlying companies held by external asset managers, thereby falling short of international standards.”
A spokesperson from the Inevitable Policy Response, however, tells ESG Investor that the Labor government’s ongoing climate policy progress is “consistent” with its Forecast Policy Scenario.
“There is still a lot of work to be done to support decarbonisation of the economy, and the government will need to continue to ramp up efforts in the coming years,” says Davidson. “Investors are increasingly looking for economy-wide policies to support the reduction of real-world emissions and Paris Agreement goals.”
Tapping into demand
As well as shoring up legislation for reporting on and categorising sustainability-related themes, the Labor government has pledged funding to key aspects of the energy transition – including critical minerals and solar power.
“What investors are looking for is not just big announcements about pots of money that go towards one company or another, but how the government plans to stimulate demand for the likes of green iron, green steel and associated products,” says Michael Bones, Advocacy Manager at the IGCC. “Something [we] have advocated for is the government being a little bolder and carrying more of the risk in these areas to stimulate more private investment.”
The promise of a Net Zero Economy Agency may also contribute to an orderly and positive low-carbon economic transformation across Australia. The agency plans to help signpost net zero transformation opportunities, coordinate policies and government programmes to prioritise clean industries, and support workers in emissions-intensive sectors to access new employment and skills in a low-carbon economy.
“[The agency] will serve as a front door to investment opportunities for investors, giving them a clearer idea of opportunities on the ground,” says Bones.
More recently, Albanese evoked the Future Made in Australia Act – a package coordinating new and existing initiatives to boost investment, create jobs and seize climate-related opportunities. More details on this are expected in May.
“With the US Inflation Reduction Act (IRA) and similar incentives in Japan, Europe and elsewhere, there’s really strong competition for capital to be allocated towards the climate transition,” Bones notes. “The government seems to understand that, for Australia to remain an attractive investment destination, baseline climate policies are needed. We now need to respond to [incentives-focused] policies in other jurisdictions.”
But first, the Australian government still has some work to do to understand the country’s exposures to climate risks, and incentivise investment accordingly.
“Physical risk is a huge challenge to address, and we have already seen that climate impacts are increasing at scale,” says Bones. “If we don’t address funding, things could get messy pretty quickly.”
Last year, the IGCC developed a 2023-2025 resilience strategy to underpin its work towards supporting investors, policymakers and companies in Australia, and help mitigate costs associated with the physical risks of climate change in the coming decades.
Institutional investors’ engagement with the Australian government will remain pivotal to ensure it continues to develop an ambitious and robust policy framework to support the country’s climate journey.
“The Albanese government has had a strong dialogue with institutional investors and is open to new ideas about how to deliver on the energy transition,” IFM Investors’ Whiteley reports. “This is incredibly welcome.”
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