Climate shifts from risk to business imperative
This was the moment when Australia’s and the world’s decarbonisation challenge moved from a strategic risk to a business imperative. The moment that locked in the change for Australian business that had been building through the year.
Climate change and the goal of achieving net zero emissions is now clearly not just a long-term risk issue for business. It’s about readiness – being ready right now to operate in new markets – for renewables, zero emissions hydrogen, for green steel and aluminium, critical minerals, and for domestic and international carbon credits. To understand the impact of this change on capital markets and the business outlook, it’s important to look at the three levers driving that change.
First is a new level of consensus at the federal level in Australia: agreement that we need to transition to net zero emissions by 2050. While the adoption of the net zero target as an official objective of government policy by no means settles every policy issue, it is already having a tangible impact on the business operating environment.
All those agencies required by statute or otherwise to take into account government policy objectives now have a clear signal.
This was illustrated on Friday when the Australian Energy Market Operator released its draft Integrated System Plan. The preferred central planning assumptions – based on both stakeholder feedback and changed government policy guidance – are now part of a more ambitious “step change” scenario that is about rapid growth in renewable energy. In turn, this will flow through to regulatory decisions on infrastructure, and more generally set industry expectations.
Second, other governments are acting. Australia’s state governments have clearly demonstrated they have constitutional power to act on climate and energy. Already we have seen implementation of increasingly far-reaching structural interventions by states – ones that change relative prices and resource allocation – and meaningfully shift core business behaviour.
Again, there’s a market impact. The NSW government, for example, has introduced major new deployment incentives for hydrogen production, in exempting new facilities from a range of government charges.
We will continue to “import” the climate policy and standards set by foreign governments. Our trading partners are likely to implement policies that prefer imports of lower emissions products.
This is in response to their own strengthened Glasgow commitments, reinforcing incentives to gain advantage in a decarbonising world economy.
Carbon border adjustment mechanisms are just one example of this. We can expect other efforts to ensure imports compete on equal terms with domestic industry subject to stronger carbon regulation. It means Australian firms need to be resilient in the face of the policies being implemented in a range of sometimes competing jurisdictions.
The third lever is the fact that the Glasgow conference wasn’t just about governments. The investment community was there in force to underline their role in financing the net zero transition.
Right now, international climate objectives are becoming factored into the architecture and plumbing of international finance. Capital is available for emerging energy technology on increasingly favourable terms. Equally, capital can be expensive or non-existent for assets that aren’t part of a plausible and consistent transition pathway.
The story is there in the numbers. Assets under management in sustainable funds have almost quadrupled over the past five years. At the same time, there has been massive growth in broader investor buy-in: signatories to the UN’s Principles for Responsible Investment now cover $US130 trillion ($181 trillion) in assets under management.
KPMG’s own research suggests well over half of investors think global capital markets are not yet adequately factoring in climate risks. The creation of a new International Sustainability Standards Board, further corporate transparency requirements on climate, and increased regulatory scrutiny all means risks will be treated more consistently.
Australian businesses understand this and are responding. While they see there is still a role for longer-term scenario planning, they also know the focus must be on setting nearer, more credible and ambitious targets. In turn, this must move rapidly to actionable investment and transition planning around existing assets and new opportunities.
So, this time around it is different. There are interlocking features of the global environment that mean the direction of decarbonisation action is clear.
Barry Sterland is KPMG’s energy transition leader
If there was one defining moment for climate action in 2021, it was when the global investment community came out in force at Glasgow. It was a pivot point, yet the full implications are only now just beginning to be understood.