Mike Cannon-Brookes-backed Melior puts heat on banks over customers’ carbon footprint

Melior chief investment officer Tim King

The Mike Cannon-Brookes-backed impact fund Melior Investment Management has stepped up its pressure on the nation’s big banks, saying they need to start measuring the carbon footprint of their entire lending book, not just loans made to resource companies.

Melior’s chief investment officer Tim King says exposure to miners is just a tiny part of the overall loan book for banks, and their other customers emit about as much carbon as miners and utility providers combined.

Better disclosure of the entire book will give the banks and their investors a more accurate picture of emissions produced as a result of their financing activities as well as the risks sitting in their loan book.

According to King, who is also Melior’s co-founder and a former head of research with Deutsche Bank, increasing the disclosure of climate risk in their lending books shines a light on the role the big four banks have to play in the nation’s transition to renewable energy. “And it’s not just about risk mitigation. It’s also about value creation,” he said.

Melior is one of a new breed of fund that is gaining favour around the world. It is built around an investment strategy that seeks to achieve positive social or environmental goals, as well as generate financial returns.

The fast-growing Melior was launched by King in early 2019 along with Lucy Steed, a former top fund executive with BT and prior to that AMP.

The private investment vehicle of multi-billionaire Mike Cannon-Brookes was a foundation investor in the fund. And last year Cannon-Brookes’ Grok Ventures upped its exposure by taking a minority stake in Melior.

In February Cannon-Brookes was part of a joint $5bn bid for AGL Energy, which operates some of the nation’s biggest coal-fired power plants.

While Melior wasn’t involved, the aim of the since-shelved bid was impact investing on a major scale, with plans to shut down AGL’s coal-fired plants.

For his part King has been looking at ESG issues through the hard lens of financial performance – how it influences value creation or destruction at companies.

“There’s been a lot of empirical and academic work to show that companies that understand ESG materials and manage them appropriately can outperform over time and create value,” he says.

Since the fund launched in 2019 it has outperformed its S&P/ASX 300 benchmark by 19 per cent in the period to the end of December. Last financial year its returns were 33 per cent.

King says the time is right for Melior to turn its attention to the biggest part of the economy. Banks have come under increasing pressure over the past decade to curb lending to carbon-intensive industries such as coal mining and coal-fired power generation.

Atlassian co-founder Mike Cannon-Brookes.

And while banks have generally pledged to scale down their exposure, King points out this form of lending is less than 1 per cent of the combined loan book for all the big four banks. And this focus on the fossil fuel industry is inconsistent with their own net zero ambitions.

He argues the major banks have the biggest opportunity to influence net zero targets by applying Scope 3 emission disclosures to their entire loan book.

This would measure the carbon emissions of all the customers of the banks to get a complete picture of how their lending activity is influencing carbon emissions.

These disclosures are likely to impact the major banks in ­different ways.

National Australia Bank has the biggest market share among small to mid-sized businesses and agribusiness; ANZ has a bigger corporate book.

Commonwealth Bank and Westpac dominate retail banking and both have large exposure to manufacturing.

All of the big four banks have made commitments to exit the financing of carbon-intensive thermal coal mining by 2030, as well as materially reduce the emissions intensity of their lending to electricity generation.

At the same time Commonwealth Bank, NAB and Westpac have set some limitations around lending to oil and gas projects.

But a climate scorecard developed by King shows NAB and Westpac both are likely to develop emissions intensity targets for their lending to high-emitting sectors, and potentially their entire loans books by the end of 2022.

This would put them up two years ahead of ANZ and Commonwealth Bank, which are yet to develop their own frameworks for lending outside of resources and energy.

King says banks are at the centre of their economy and have influence over their customers.

But at the same time regulatory pressure is increasing for banks to get across the risks in their entire books.

There are also so-called transition risks – or fallout from exposure to climate change.

These come in many forms, including greater probability of default for business loans to owners of stranded assets; regulatory intervention around climate; litigation by individuals or com­munity groups; and exposure to mortgage and small business customers with greater risk of natural catastrophes.

“If you go down to the micro level, those same climate risks are evident, given that the banks are lending throughout all areas of the economy – whether it’s resources, manufacturing or agriculture and those climate or transition risks are in the loan books of the banks,” he says.

The bulk of the emissions of the banks lie in other sectors like manufacturing and agriculture and the residential sector.

So that’s where the issues for physical and transition risk are for the banks.

“Just look at all the flooding we’re getting now,” he says.

“What are physical risks in the banks lending book, their mortgage books?

“The questions, I think, are going to just become increasingly important and clearly we need data to understand that because then we just really don’t have that at the moment”.

Melior meets regularly with boards and senior executives, asking how they report on ESG issues through the organisation, how they assess the risks, and the opportunities the ESG presents.

Or as King points out, the right ESG settings are “not just all about risks”.

“It’s about understanding opportunities. This can be from renewables or new technologies, green hydrogen, energy efficiency.

“It’s not just about managing risk, it’s also about the upside.

“One of the messages, I tell companies when talking to them, and you better get on this journey quickly, and as soon as you can, because there’s massive resourcing that’s going to be involved.”

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