As noted by BankTrack, Finance Day brought no new commitments from banks, while a UN high-level expert group warned that businesses should not claim to be net zero while continuing to finance new fossil fuels. Agriculture and biodiversity protection were side-lined due to the upcoming convention on biodiversity in December where governments negotiated on a Global Biodiversity Framework. Like the wide-spread pressure for banks to disclose and manage down financed emissions, a focus on bank financing the expansion of industries closely related to biodiversity loss, such as meat and dairy, is going to be increasingly adopted by responsible investors.
Australia also moved to signed up to the Global Methane Pledge a “non-binding” ambition to cut methane emissions by 30%. Methane is 24% of Australia’s emissions (world’s 11th biggest emitter), with around half coming from the agriculture sector. $3bn of the Govt’s $15bn national reconstruction fund will focus on efforts to reduce agricultural methane and other clean tech initiatives. The focus will not just be agriculture, with other major methane sources in energy, resources, and waste sectors also to be addressed.
The Victorian Government took us back to the future early in the quarter as they proposed to relaunch public ownership of (renewable) energy resources with a revived State Electricity Commission (which was privatized in the 90’s) to become an active energy market participant. If re-elected the new SEC could become a state-run retailer, a partner for a like-minded retailer or remain solely in the wholesale generation market.
Renewable targets will be lifted to 65% of generation by 2030 (up from 50%) and 95% by 2035. An initial investment of $1bn will deliver 4.5GW of publicly owned clean generation replacing the capacity of coal-fired Loy Yang A power station which is set to close in 2035. Emissions reduction targets have also been improved with net zero a target for 2045 – five years ahead of previous commitments and matching the ACT.
In corporate sustainability initiatives, NAB is looking to incentivize home loan customers toward sustainability standards that will indirectly help the bank reduce their Scope 3 financed emissions and ultimately improve credit worthiness. Eligible home loan customers will enjoy lower variable rates for homes that meet a NatHERS 7-star rating or a Green Building Council of Australia Green Star rating. While in the UK Lloyds banking Group pledged it will no longer support the direct financing of new greenfield oil and gas developments unless they can be shown to be part of a “credible” transition plans. However, the bank also delayed plans to have no clients who operate UK coal-fired power stations by end-2022. Plans to stop financing for coal power stations is on pause following the UK government’s request to keep some thermal stations online until 2023 to ensure energy supply this winter.
The Climate Change Authority (CCA) in their advice contained in the first Annual Climate Change Statement to Parliament, recommends establishment of sector pathways to net zero emissions. The report entitled “First Annual Progress Report 2022: The baseline, global context and methodology”, sets a baseline for the current status of climate policies and emissions reductions in Australia and articulates a framework by which the CCA will use to assess progress towards Australia’s emissions reduction targets.
Sector pathways are important for investors as are critical in formulating decisions at a state and local industry level within the context of the overall long-term strategy for emissions reductions. This strategy sets expectations for when, how, and by how much, emissions should be reduced across different sectors of the economy, enabling investors to assess the impact of differential targets across sectors (and therefore the impact that may have on companies within those industries, and the financial position of state governments with each having a greater of lesser exposure to the industries most challenged by the targets).
The Investor Group on Climate Change (IGCC) on behalf of its members stated priorities sort clarification on specific, Sector by Sector targets and pathways. As noted by Erwin Jackson, IGCC Director of Policy, “Investors have the capital ready to fund climate solutions. A reliable picture of the risks and opportunities across all sectors of the economy will open the door for investors to allocate capital to these solutions with confidence.”
December was a big month for sustainable finance in Australia with the Government releasing a consultation paper on the development of an Australian climate risk disclosure framework. The framework will be consistent with internationally comparable Disclosure with reporting expected to be mandatory for large entities and phased-in over time. The consultation period is open until 17th February 2023. Additionally, the Government has tasked Treasury with developing a comprehensive sustainable finance strategy which will include "a range of measures to improve transparency, deepen Australia's green finance markets, and seize opportunities presented by surging global momentum in sustainable finance".
Importantly the strategy will include the development of Australian taxonomy which will support the development of the sustainable finance market and assist i reducing greenwashing and strengthening Environmental, Social and Corporate Governance (ESG) labelling of financial products. The development of this strategy aligns with the progress already made with the legislation of Australia's net zero commitment by 2050 and the updated nationally determined contributions (NDC) targets of a 43% reduction of carbon emissions by 2030.
The Government announcement was followed by the release of the Australian Sustainable Finance Institutes (ASFI) framing paper "Designing Australia's Sustainable Finance Taxonomy". The document provides design consideration including the key principles, purpose, objectives, sectorial prioritization, governance and timelines for the development of an Australian Taxonomy.
Post the consultation period ASFI will commence work on the governance structure, expected to be completed in mid-2023 and then move on to the technical screening criteria for the priority sectors. This is expected to run until mid-2025. While climate change adaptation was deemed highly important, climate change mitigation was seen as the most pressing concern. A lack of clear and credible guidance on the type of activities that are aligned with the government's Net Zero Commitments only hinders Australia's climate progress. Post completion of the taxonomy, financial institutions will be able to identify economic activities that address key environmental and social objectives, such as alignment to the Paris Agreement, biodiversity risks and opportunities and key Government climate objectives. The taxonomy will also provide local regulators with the option of incorporating sustainable finance into prudential standards, allow a strengthening of sustainable labelling standards for financial products and assist in addressing greenwashing.
The UN Biodiversity Conference (COP 15) was held in December and the unveiling of the Kunming-Montreal Global Biodiversity Framework has been held out as biodiversity's Paris Agreement moment. Parties agreed to the landmark agreement to guide global action on biodiversity through 2030.
The proposed Global Biodiversity Framework (GBF) consists of four key goals to protect nature and 23 targets.
Goal A includes substantially increasing the area of natural ecosystems by 2050, halting of human-induced extinction of critically endangered species and reducing the extinction rate of all species tenfold by 2050.
Goal B: Biodiversity is sustainably used and managed and ecosystem functions and services are valued, maintained, and enhanced with ecosystems indecline being restored.
Goal C: Monetary and non-monetary fair sharing of genetic resources, digital sequencing of genetic information and of traditional knowledge as it relates to genetic resources.
Goal D: Implementation, including financial, technical, and scientific resources needed to implement the framework with particular focus on the least developed countries. Among the key targets agreed upon included the following
- Effective conservation and management of at least 30 per cent of the world's land, coastal areas and oceans. Currently, 17 per cent of land and 10 per cent of marine areas are under protection.
- Restoration of at least 30 per cent of degraded terrestrial, inland waters and coastal and marine ecosystems.
- Reduce to near zero the loss of areas of high biodiversity importance and high ecological integrity.
- Halving global food waste.
- Phasing out or reforming subsidies that harm biodiversity by at least $500 billion per year, while scaling up positive incentives for biodiversity conservation and sustainable use.
- Mobilizing at least $200 billion per year from public and private sources for biodiversity-related funding.
- Raising international financial flows from developed to developing countries to at least US$ 30 billion per year by 2030.
- Requiring transnational companies and financial institutions to monitor, assess, and transparently disclose risks and impacts on biodiversity through their operations, portfolios, supply and value chains.
In further steps to improve capital market confidence in financial and sustainability reporting, the International Sustainability Standards Board (ISSB) has moved to enhance connectivity between ESG concepts and financial disclosures by explicitly articulating the relationship between sustainability matters and financial value creation. As part of that, ISSB has clarified the definition of “sustainability” as: “the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium and long term.”
Further clarification was given earlier this quarter on the pathway to climate disclosure with the ISSB confirming Scope 3 GHG emissions will be included in global sustainability-related disclosure standards. These global sustainability standards will be published as early as possible in 2023.
Relief provisions will be provided to companies applying the Scope 3 requirements and could include giving companies more time to provide Scope 3 disclosures and working with jurisdictions on so-called ‘safe harbour’ provisions.
The ISSB said that referring to this articulation of the value creation process, a company will be better placed to explain to its investors how it is working sustainably within its business ecosystem—addressing the impacts, risks and opportunities that can affect its performance and prospects—to ultimately deliver financial value for investors. It also provides important context for companies when making materiality assessments. This report provides insight into the impacts the fund is making to the lives of millions of people across Australia and the world.
AUTHOR: Bill Bovingdon, CEO Altius Asset Management
Disclaimer: The above is intended as general market commentary only and is not intended as, and does not constitute, advice of any kind. No liability is accepted for any action taken based on the above or for any loss suffered as a result of reliance on the same.
