The Policies Investors Need To Fund The Transition to Net Zero

28 September 2022
The Investor Group on Climate Change, whose members have more than $3 trillion in Australian funds under management, have announced the high priority policies that can unlock capital for Australia’s transition to net zero.

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With climate risks and opportunities having become a mainstream consideration in global capital markets, trustees are now focusing on how to invest in emissions-reducing assets, and how to protect beneficiaries’ long-term returns from the physical impacts of climate change.

The CEO of the Investor Group on Climate Change, Rebecca Mikula Wright said: “Institutional investors have the capital to finance a clean energy economy.

“Many governments, businesses and investors have already committed to achieving net zero emissions. The biggest barrier to reaching these goals remains lack of stable policy that supports investment in zero carbon technologies, goods, and services.

“Governments can’t finance this transformation themselves, but they can set policies that will unlock billions in private investment.

“Climate change will be a crucial factor in beneficiaries’ long term financial returns, and the highest net economic benefit is limiting climate change damages from warming above 1.5°.”

Since the federal government was elected it has taken positive steps to build investor confidence in Australia. The passage of the Climate Change Act, a commitment to implement fuel efficiency standards, and announced reforms to the Safeguard Mechanism are positives for the Australian investment environment.

Over the next three years, investors’ priorities for additional policy include;

  • Aligning national emissions targets to 1.5°C, which implies a 2035 target of approximately 75% reduction,
  • Establishing sector by sector goals to 2050, based on advice from the Climate Change Authority, to guide policy and investment,
  • Ensuring the country’s current carbon pricing tool, the safeguard mechanism, is aligned with 1.5°C,
  • Establishing a National Transition Authority to support a just and orderly transition to net zero,
  • Unlocking private sector investment in adaptation and including climate risk in all relevant planning, land use rules, and direct investment policies.

The policy priorities are based on extensive input from the mainstream of Australia’s institutional investment industry, including IGCC’s membership and industry peak bodies.

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Quotes from IGCC Members

Aware Super Chief Investment Officer, Damian Graham

“Climate change represents one of the greatest systemic risks for Aware Super’s $150 billion investment portfolio. To help our members achieve their best possible retirement income over the long term, it is vital that we play a strong role in reducing their exposure to climate risk by reducing the emissions profile of our portfolio, in line with our Climate Change Portfolio Transition Plan.
“This reduction needs focused activity to achieve a net-zero economy and we welcome the Commonwealth Government’s recent legislation, as well as the intentions outlined in the IGCC report which also identified new investment opportunities in energy transition.”

Cbus Super Chief Investment Officer, Kristian Fok,

“At Cbus, we’re acutely aware of the opportunities and impacts that climate change has for our members’ long term financial returns. As part of our fiduciary duty, we’re setting net zero targets, and advocating for the policies that will underpin efficient investment in climate solutions.
“Many of our members have deep links to the building industries that have such an important role to play in adapting to climate change, so we’re particularly keen to support IGCC’s recommendations for policies that will help increase Australia’s resilience to physical climate risks and support an equitable transition towards net zero.”

HESTA Super Fund Chief Investment Officer, Sonya Sawtell-Rickson

“Australia achieving both its net zero goals and a timely, orderly, and equitable transition is going to need significant investment from large institutional investors like superannuation funds that have the long-term focus, expertise, and scale necessary to support economy-wide change.
“Climate change represents a systemic financial risk in our portfolio, and we believe investors have an important role to play to support the transition to reduce this risk. This is why HESTA recently committed to lifting our interim carbon reduction target to a 50% cut in normalised emissions by 2030. We are also targeting investing 10% of the portfolio in climate solutions by 2030, to support the transition.
“This is a critical decade for climate action. It’s vital that government encourage and facilitate accelerated investment by establishing long-term policy and regulatory clarity, which will help attract investors and enable them to underwrite opportunities with higher certainty to achieve appropriate risk-adjusted returns, while supporting the transition.”

ACSI Executive Manager Stewardship, Ed John

“Australian investors see an opportunity for policy reform that will boost the resilience of communities and the broader economy to climate change.
“The Climate Change Bill has provided an important start but further measures will be required to unlock the private investment required to deliver deeper emissions cuts that limit warming to 1.5 degrees.”

Australian Ethical Head of Ethics Research, Stuart Palmer

“As our climate reality has become clearer, so have the government policies needed for an effective and just climate response.
“The IGCC policy priorities reflect a simple fact: delay in strengthening targets, pricing carbon and proactively protecting people and property means worse social, environmental and economic outcomes for both current and future generations.”

Key Policy Priorities

To deliver sustainable long-term returns to beneficiaries and the broader economy, policy should contribute to three main objectives:

  • limiting climate change damage by reducing emissions and limiting global warming above 1.5°C,
  • undertaking transformational adaptation and resilience to limit climate damage from current and committed climate change, and
  • ensuring financial flows in the economy support the above two objectives.

Aligning National Economic Strategy to 1.5 °C:

  • Australia’s emissions targets under the Paris Agreement, the Nationally Determined Contributions (NDCs), should be aligned with limiting global warming to 1.5 °C.
  • Social equity should be central to policy decisions. Australia should establish a National Transition Authority (NTA) to support a just and orderly transition.
  • The Australian Government should establish clear 2030, 2035 and 2040 climate policy goal posts for the economy’s key sectors. This would include:
    • ensuring the country’s existing carbon pricing mechanism–theSafeguard Mechanism – is aligned with 1.5°C
    • putting in place an emissions reduction incentive across the electricity market to ensure the orderly and timely closure and replacement of coal-fired generation
    • implementing targeted policies to build domestic and international demand and consumption of near-zero emissions products such as green hydrogen.

Aligning Finance to 1.5°C

  • Australia needs a mandatory climate risk disclosure regime that is consistent with international best practice and fit for purpose for Australia. The regime should be aligned with the Task Force on Climate-related Financial Disclosures (TCFD) and signal that the International Sustainability Standards Board (ISSB) standards will be adopted into Australia.
  • Australia should commit to phasing out all fossil fuel subsidies by 2025, with the process being established in consultation with investors, business and the broader community.

Climate Adaptation and Resilience

  • A standing advisory group with Council of Australian Governments (COAG) members and the private sector should be established, with a core mandate to develop and drive a range of financial products, mandates and co-investment opportunities to co-fund resilience and adaptation investment.
  • Australian federal, state, territory and local governments should consider the physical risks of climate change in any land use planning decisions, building codes and other relevant regulations.
  • The Australian Government should provide consistent, accurate, comprehensive, timely and commercially available records of national physical climate risks and fund adequate science to produce this data reliably.