ESG Impact: What you need to know - August 2022
In Westpac IQ’s August wrap of the latest ESG developments making the headlines, Westpac Institutional Bank’s team of ESG experts explain what’s happening globally, why it matters and what it means for you.
CORPORATE
Listed companies miss decarbonisation target
While more of the world’s listed companies are taking action to reduce their carbon emissions, most are falling short of the 1.5°C target set by the Paris Agreement. Findings of the latest quarterly Net-Zero Tracker, published by investment research firm MSCI, show almost half align with a rise of 2°C, and just 11 per cent are on track with a 1.5°C temperature rise.
The Net-Zero Tracker examines the climate impact of listed companies based on their projected emissions. Its latest findings show listed companies are on track to cause average global temperatures to rise by 2.9°C above preindustrial levels by 2100. To align with the global goal of 1.5°C, listed companies would need to cut their total carbon intensity by an average of 8–10 per cent each year between now and 2050.
Why does it matter?
The results of the latest Net-Zero Tracker are concerning, with almost half of listed companies on track for a 2°C degree temperature rise. We expect to see a positive shift in the index over the next 12 months as more companies build the clarity and confidence required to realise their Paris-aligned strategies.
With enhanced scrutiny of greenwashing in the market, many companies may be cautious about releasing their emissions targets, especially in the absence of standardised structures and frameworks for ESG reporting. Robust transition strategies take time to develop, particularly for hard-to-abate sectors and, while disclosure helps investors assess the carbon intensity of companies, the publication of emissions targets must be backed by a credible plan.
POLICY
Carbon credit scheme in the spotlight
The Federal Government has announced a review of the AUD 4.5 billion Emissions Reduction Fund, which issues Australian Carbon Credit Units (ACCUs). The six-month review aims to restore public confidence in the carbon credits scheme and ensure it can support the country’s climate transition plans.
Led by Australia’s former chief scientist Ian Chubb, the review will investigate the credibility of methods such as human-induced regeneration, carbon capture and storage, avoided deforestation and landfill waste gas. It will also examine the potential for carbon credits to generate secondary benefits, such as improving agricultural productivity and the involvement of Indigenous communities.
Why does it matter?
Offsets will be an important element of an organisation’s net-zero targets, especially those nearer term targets. Carbon credits are not uniform however – they come from various sources, such as reforestation and renewable energy projects, and carry different governance standards and prices. As a result, a robust, globally relevant carbon credit scheme is vital in setting minimum standards.
The Federal Government’s Climate Change Bill 2022 passed the House of Representatives this month and will enshrine into law an emissions reduction target of 43 per cent from 2005 levels by 2030 and net-zero emissions by 2050. A review of the Emissions Reduction Fund may create more certainty in the market and represents an important step in the country’s transition. With Australia’s potential to create a large number of offsets, consistency of offset quality at a global level will be important.
Environment report delivers dire warning
The pressures of climate change, habitat loss, invasive species, pollution and mining are taking a toll on Australian ecosystems with the Federal Government’s State of the Environment Report showing alarming signs of deterioration across the natural landscape.
At least 19 of our ecosystems have shown signs of collapse or near collapse, including the Murray-Darling Basin, where water levels were at record lows in 2019 due to extraction for agriculture and droughts. The report also reveals Australia has one of the highest rates of species decline in the developed world, with extinction largely due to introduced species, habitat destruction and clearing. A Government policy response to the report will see 30 per cent of Australia's land and oceans protected by 2030.
Why does it matter?
With more companies integrating natural capital into their climate transition strategies, business has an important role to play in preserving and restoring Australia’s ecosystems. Carbon credits, which are generated primarily from land restoration projects that restore native vegetation and take carbon dioxide from the atmosphere, will help Australia’s transition to net-zero. The Federal Government’s review of the Emissions Reduction Fund aims to ensure the carbon credit scheme is fit for purpose.
The science-based, market-led reporting framework from the Taskforce on Nature-related Financial Disclosures will also enable companies to integrate nature-related risks and opportunities into decision making. Version 0.2 of the beta framework was released in June. With the health of our environment underpinning economic and social prosperity, measuring the value of nature will help to preserve it.
ACT to cut new gas connections
Next year will mark the end of new gas connections for homes and businesses in the ACT. The transition is part of the territory’s plan to phase out fossil fuels by 2045 and follows recent moves by the Territorian government to ban the sale of internal combustion engine vehicles (ICE) within the ACT by 2035.
While natural gas accounts for approximately 20 per cent of the ACT's emissions, Canberra's electricity is sourced from 100 per cent renewable energy. The transition has seen the Territory reduce its greenhouse gas emissions by approximately 40 per cent.
Why does it matter?
The ACT led the country in sourcing its entire electricity supply from renewable sources from 2020. It also has more renewable energy power purchase agreements at government level than any other state or territory and its stance on internal combustion engine vehicles will help power Australia’s electric vehicle market.
The ACT Government is developing an Integrated Energy Plan to guide manageable transition over the next two decades. The plan will ensure the territory maintains a reliable and sustainable energy system for the future and will consider the use of renewable gas in niche applications. However, with fewer users of the gas pipeline from 2023, Territorians may see an increase in the cost of this power source. This presents an opportunity for business to explore electrification options, which will prove increasingly cost effective when teamed with on-site solar PV.
WESTPAC IN ACTION
How decarbonisation is reshaping business
While ESG management and risk mitigation are driving of the uptake of sustainable finance, the potential for increased commercial returns is also a strong motivator. This is one of the findings of Financing for sustainability: Asia Pacific’s evolving ESG market, an Economist Impact report sponsored by Westpac.
The report findings are explored in a series of articles - the latest ‘Financing for sustainability: Risk and reward drive decarbonisation’ includes ESG insights from Australian business leaders.
Kate Bromley, General Manager for Responsible Investment at QIC, discusses the corporation’s strategies for investing in climate solutions and energy transition opportunities. QIC’s Head of Private Debt, Andrew Jones, explains how sustainability linked pricing mechanisms help borrowers transition away from carbon fuels towards net zero. Sally Townsend, Head of Sustainability at Blackmores, discusses the company’s “very strong sense of urgency” to step up both its environmental and social impact efforts.
Read more about how decarbonisation is reshaping business.
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