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It’s time to re-think investment on the road to net zero

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By Josh Martin, Senior Director, ANZ, ENGIE Impact

Recently Josh Frydenberg issued a warning that should send a chill through many sectors of our economy.

The country’s Treasurer said Australia needs to set a net zero commitment now or we will risk capital markets increasing their borrowing costs and placing a financial burden across a range of our sectors. A failure to act will also likely result in Australia and the world experiencing the worst outcomes of climate change in our lifetimes.

Organisations on both sides of the Tasman have been escalating decarbonisation ambitions as investors, boards, and executives increasingly view climate change as both a moral and financial risk, as well as a sustainable opportunity to rebuild the nation as we emerge from the pandemic. The Task Force on Climate-related Financial Disclosures (TCFD) in particular has helped businesses in Australia understand that climate change poses a financial risk to the global economy.

The number of ASX200 listed companies with Net Zero emissions targets soared to 49 in the year to March 2021, with AGL Energy, AMPOL, Coles and Origin Energy joining the ranks. In fact, more than half of the market capitalisation of the ASX200 is now covered by Net Zero commitments.

The sentiment is promising, but as we head into 2022, the focus will be on how many of these companies turn intent into action. Understandably, as 2020 wrought havoc across the world, a lot of businesses went into financial survival mode and bold decarbonisation targets fell by the wayside.

As leaders revisit these ambitions, it is imperative that investments are made into research and development, as well as turning supply chains, technologies, and training procedures to meet renewed targets. But to ensure an unwavering commitment to action, a granular investment approach that offsets risk and allows for future opportunities to be seized is essential.

A long-term view to a greener future

Treasurer Frydenberg encapsulated the approach we need to take on the journey to decarbonisation, saying: “It’s a long-term shift, not a short-term shock.”

Many leaders fall into the myopic trap of investing in low-cost sustainability projects with quick payback periods and believing they can replace high-impact decarbonisation investments. While short-term projects such as routine energy improvements can provide incremental progress, they should not come at the expense of long-term goals.

Often leaders balk at projects that require sizeable upfront capital expenses, fearing losses that cannot be recouped. But this belief is limited in that it completely neglects the economic benefits of an enhanced reputation and long-term value, which is an inevitable by-product of reductions to climate risk.

Take Australia’s Atlassian for example. The company has been vocal about the long-term strides it is taking towards 100 per cent renewable energy, saying that “in two, five, 10 years and beyond we’ll be able to see the impact on customers, our culture, and society through sustainability investments. It’s the right long-term bet to make, full stop.”

Investors are placing mounting pressure on organisations to set meaningful, long-term sustainability goals. While this narrative has existed for years, recently words have been translated into action.

This year’s report by the Intergovernmental Panel on Climate Change, which found that the world was accelerating towards the 1.5-degree tipping point for catastrophic climate change and may get there in the 2030s, was the tipping point for many investors. Following this warning, Australia’s second-largest superannuation fund, Aware Super, said it will strip substantial capital from companies failing to act on climate change risks.

There is no longer any excuse to not meet longer term decarbonisation goals, with leaders needing to go beyond the low-hanging fruit to enact meaningful change.

Turning Climate Ambition into Action

Chief Financial Officers (CFOs) need to re-think their capital allocation models, restructure investment criteria, build programmatic approaches to project finance and establish third-party partnerships to deploy capital and reduce risk.

This begins with bringing a sustainability mindset to all financial decisions, breaking down departmental silos to ensure every level of internal leadership has a seat at the Net Zero table. The finance department should share accountability for the organisation’s sustainability transformation, ensuring it is not a bolted-on addition but the main force driving business success.

Coles, which was recently listed as Australia’s most trusted brand, has drawn a direct line between its sustainability performance and capital, with its CFO Leah Weckert saying that if pre-defined targets, including a reduction in CO2 emissions are not met, the organisation does not enjoy the benefits of lower interest rates. This initiative has reportedly “incentivised everybody” to contribute.

It is also important that organisations revise investment criteria to account for opportunities and risks that will arise as markets shift. Given that we have seen carbon prices change, physical threats to operations manifest, and increasing pressure from investors, it is imperative to broaden investment criteria to make room for such risks. Additionally, robust modelling of future scenarios can better inform planning positions to seize future opportunities.

Often, internal capital is insufficient for scaling decarbonisation projects, and ultimately, the greatest returns both in terms of carbon reductions and operational risk mitigation require third-party financing models. These agreements shift responsibility for the management of sustainable initiatives to a specialised provider, allowing for a wider pool of projects while limiting operational and capital expenses in areas in which the business does not operate.

As more and more companies across Australia and New Zealand set their sights on Net Zero strategies, financial mechanisms are needed that unlock decarbonisation as well as limit exposure to risks. Today, thanks to pioneers in the industry, technology exists to take carbon-heavy processes and turn them green.

As we embark on the road to Net Zero, organisational leaders need to look beyond traditional internal funding models to get the most out of decarbonisation investments. The acceleration of these sustainable efforts is essential for Australia to rebuild its economy, stay competitive on a global stage, and pave the way to a cleaner future.

About Author:

Josh Martin is the Senior Director of ENGIE Impact, which brings together a wide range of strategic and technical capabilities, to provide a comprehensive offer to support clients in tackling their complex sustainability challenges from strategy to execution.

Global Banking & Finance Review


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