The extreme weather we have witnessed along the eastern seaboard of Australia, accompanied by wide scale flooding, has once again brought into sharp focus the impact and presence of climate change. This assuredly means that as we approach the Federal election, all matters environmental can be expected to form a key policy and political battleground between the two major parties.
Many in corporate Australia will no doubt observe this with more than a passing interest, in particular the impact the election outcome will have on so called ESG (Environment, Social, Governance). The ESG prism presents both risks and opportunities for companies, especially in the way they act to address climate change, most notably what they commit to do and by when, and how they intend to do it.
Specifically, companies are currently grappling with the scale of the commitment they should make with respect to reducing carbon emissions. Given that both the major political parties support a policy of achieving net zero emissions by 2050, this surely becomes the absolute minimum a company must commit to. Some have, and will be, more adventurous and it may well be that if Labor wins power, the 2050 date will be reduced even further. Labor is already committed to a 43% reduction by 2030, (with the Coalition sticking to between 26% to 28%), so emissions reduction and how it is achieved may well become even more ambitious and prescriptive. Indeed, the Coalition is warning that Labor’s target is just an opening gambit and that if they form government, the figure will be increased.
Regardless of where these targets may eventually end up, some have clearly decided it is beneficial from a business and reputational perspective to make a firm commitment to reducing emissions. For example, the major retailers appear to be heeding the wishes of their customers and the market () by committing to definite action. Woolworths says it will deliver a 63 per cent reduction in emissions from its own operations (scope 1 and 2) and a 19 per cent reduction across its supply chain (scope 3) by 2030. Both Woolworths and Coles have also committed to source 100 per cent renewable electricity by 2025.
What is even more important for companies is that they must also decide whether it makes them an attractive investment proposition as a result of building their ESG credentials. For example, if they undertake significant capital expenditure on renewable energy, which with current low electricity prices can often have a long-term payback, will they be rewarded for their ESG commitment, including greater access to capital at a more competitive rate, so called ‘green financing’.
Australian superannuation funds who between them manage assets totalling $3.4 trillion, have made their intentions clear as to what they are committed to and what they expect companies and significant sectors of the economy to do. For AustralianSuper, this means reducing their investment portfolio carbon intensity to a net zero level by 2050. They go on to proclaim that ‘the steps to achieve this include transitioning away from high-carbon investments, such as fossil fuels, and toward renewable investments such as wind and solar. This is consistent with the transition occurring globally. It also means influencing the way companies operate so they emit less carbon in their business operations.’ This last sentence is telling, and it is effectively a warning to all companies, (not just the energy sector) that they will be expected to take real action to reduce their carbon emissions, regardless of what sector they operate in, and by definition they should also properly assess the financial risks of climate change to their ongoing profitability.
This then raises the question as to how companies will reduce their emissions. On a macro level, the Coalition has stated that net zero by 2050 will predominantly be achieved through new technology. If one takes the view that there is eventually a technological solution for everything, then it may well be that technology comes to the fore before or by 2050. The Coalition also credits recent forecast emissions reductions to Australian households taking up solar energy and other renewables in greater numbers than ever before. On that basis, it can be assumed the Coalition will seek to make solar energy more affordable, while Labor on the other hand has committed to also boosting electric vehicle numbers, supported by investment in so called ‘green metals’ to enable expanded battery power storage.
Whoever wins the next Federal election, and it may well be that one or two of the so called ‘Climate Action’ independents have a say in the balance of power, it is clear there will be an expectation that corporate Australia play its role in reducing carbon emissions. In many respects it already is, and the market has spoken, and some companies have undoubtedly taken the lead. For the others though, both public and private companies, they need to start turning their mind to how they will track, manage and reduce emissions – and the potential costs of doing so. To be certain, there are many things they could do beyond using renewable energy, such as reduced transport, greater materials efficiency and reducing waste to landfill.
Regardless of what the government may do, taking the easy route such as buying carbon credits or seeking to indirectly reduce emissions through the efforts of others, will simply no longer cut it in the world of ESG. Companies will be expected to take direct action and although they may not know exactly how they will do it. Government, the market and broader community will only allow them a certain period of grace before they make them act, either through a legal requirement or public pressure.
As an election year, 2022 is shaping up as the year in which ESG becomes mainstream and is no longer just a nice thing to do. Government policy and decision making will contribute to this as will capital and equity markets which are placing ever greater store in how a company addresses the risks and opportunities presented by climate change. Utilising reporting frameworks such as the Taskforce on Climate – related Financial Disclosures (TCFD) will grow ever more important, but so will practical action, with companies needing to navigate how they will deal with climate change through their entire supply chain.
Those who fail to act or at the very least fail to start planning, will attract not only the attention of government and policy makers, but they will also potentially become pariahs in the marketplace. Those who do act stand to reap the benefits of not only greater access to capital on more preferential terms, but also the reputational enhancement in the eyes of a public that is increasingly demanding greater ESG action from both governments and companies.