ESG Impact: What you need to know - November 2022
Your round-up of the latest standout ESG developments making the headlines, from corporate highlights to policy updates. What’s happening globally? Why does it matter? What does it mean for you?
POLICY
Federal Budget boosts climate investment
The Federal Government’s 2022-23 Budget outlines major investments in climate-related measures and is the first of its kind to acknowledge the fiscal impact of climate change.
The budget notes that the physical impacts of climate change, such as higher average temperatures and more extreme weather events, “reduce economic activity by lowering productivity, damaging physical capital, and disrupting certain regions and industries”. It also states that these impacts erode the current tax base and put upward pressure on expenditure.
The budget’s climate-related spending includes the AUD 20 billion Rewiring the Nation program, funding for the Marinus Link interconnector between Victoria and Tasmania, and a further AUD 1.5 billion in concessional financing for six renewable energy zones in Victoria.
Why does it matter?
Acknowledgment of the fiscal impact of climate change may help to accelerate the country’s transition to net-zero. Investment in climate-related measures at a federal level also provides greater support for state-based goals and gives organisations reassurance of the government’s commitment to a clean-energy future.
Investments in projects such as Rewiring the Nation also represent the modernisation of Australia’s electricity grid and demonstrate the importance of transitioning from isolated power systems to the integrated National Electricity Market.
Support for projects such as KerangLink between Victoria and NSW and Marinus Link between Tasmania and Victoria will help to unlock renewable energy and may help reduce energy prices.
Taxonomies on the priority list for regulators
The Australian Council of Financial Regulators (CFR) has published a stocktake of recent and planned regulatory activities relating to risks and opportunities posed by climate change.
Its priorities for 2022/23 include:
- Further analysis to better understand the climate-risk exposures of financial institutions and the financial system
- Strengthening the building blocks required to facilitate high-quality and comparable climate-related disclosures. This is in line with the Federal Government's commitment to introduce disclosure requirements aligned with international standards.
- Supporting a coordinated approach to sustainable finance and taxonomies. This includes continuing engagement with industry on an Australian approach to sustainable finance taxonomies.
To support these priority areas, the CFR agencies will continue to look at the challenge of assessing climate-related financial risks and opportunities with inadequate levels of data.
Why does it matter?
Australia currently lacks common definitions for sustainable economic activities. Understanding the gaps in the availability and quality of data will help develop high-quality climate-risk assessments and disclosures. It will also assist in the development of meaningful taxonomies to define sustainable investments in a credible and transparent way.
Taxonomies will help direct capital into projects and investments that will accelerate Australia’s transition to net-zero. They will also provide investors with confidence and assurance of sustainability claims and help in the comparison of investment products and portfolios.
From a financial services perspective, banks have a regulatory requirement to understand clients’ ESG activities. A coordinated approach to sustainable finance and taxonomies will help capture data in a meaningful way and help to support Australia’s energy transition.
World leaders convene on climate change
Against the backdrop of a spiralling energy crisis, rising inflation and a string of climate-related disasters, delegates arrived for the COP27 conference in Egypt to review national and international progress, raise ambition on emissions cuts and draw up funding plans to help vulnerable countries adapt to climate change.
Despite no commitment by the world’s major emitters to phase down fossil fuels, nor any new commitments on climate mitigation, a key achievement of COP27 was a breakthrough agreement to provide “loss and damage” funding for vulnerable countries hit hard by climate disasters.
Spearheaded by Pakistan, who was hit by devastating floods resulting in over 1,500 deaths this year, the agreement establishes a transitional committee, which will make recommendations about the fund at COP28 next year. However, significant hurdles will need to be addressed before such a mechanism can become reality. These include the domestic political will for wealthy countries to contribute to this fund, given past unfulfilled pledges to mobilise USD 100 billion in climate finance by 2023.
Why does it matter?
Since last year’s Glasgow COP26 Conference, the finance sector has become more central in climate change discussions. The Global Finance Alliance to Net Zero (GFANZ) has grown by more than 20 per cent, and today there are 122 banks from 41 countries signed up to the Net Zero Banking Alliance, which covers 40 per cent of global banking assets.
Westpac expects the growing focus on sustainable finance to be matched by a greater expectation for central banks, commercial banks and institutional investors to accelerate the investment into low carbon solutions and opportunities.
In talking to our customers, we know that most have set carbon reduction targets, and many are making increasingly ambitious commitments. This is happening despite reports that limiting global warming to 1.5°C is becoming harder to achieve.
We are committed supporting our customers in this transition in a financially responsible and safe manner and this will continue to be our focus.
CORPORATE
Net-zero targets fall short for ASX200
Despite a growing number of net-zero pledges across corporate Australia, new research shows most ASX200 companies are missing the mark on emissions reduction targets . The Australian Council of Superannuation Investors’ ‘Chasing 1.5°C: The ASX200 – on the right trajectory? report examines the climate commitments of 187 companies in the ASX200. It shows concrete, measurable short and medium-term emissions reduction milestones are largely missing. This impedes investors’ ability to understand how companies intend to meet their ambitions.
The report includes analysis provided by the Climateworks Centre and shows that 45 per cent of companies have set net-zero targets for their scope 1 and 2 emissions, and that 73 per cent of these are aligning the targets to the 1.5°C trajectory. However, only 9 per cent of companies have 1.5°C-aligned net-zero targets covering all applicable emissions scopes. It also shows that 48 per cent of companies have not set any absolute emissions reduction targets and current commitments will see a 36 per cent overspend of corporate Australia’s ‘carbon budget’ between 2021 and 2050.
Why does it matter?
The transition to net-zero is complex. Investor expectations are changing rapidly, and many companies face a challenge in ensuring their transition strategy is keeping up with the pace in a rapidly evolving environment. The increasing focus on measuring Scope 3 emissions embedded in supply chains and partnerships is proving particularly challenging due to the limited availability of quality data.
However, the Australian Council of Superannuation Investors’ report reinforces the importance of climate reporting to enable companies to measure their own progress and compare it to that of their peers. These kinds of measurements can also inform net-zero planning and decision-making.
Shell leads mining EV initiative
Energy giant Shell has launched a consortium aimed at expediting the electrification of mining vehicles. The initiative includes the development of an end-to-end, interoperable electrification system pilot for 220 off-road vehicles and offers the industry an immediate potential to shift away from a long-standing reliance on diesel. The nine-member consortium includes Skeleton, Microvast, Stäubli, Carnegie Robotics, Heliox, Spirae, Alliance Automation, Worley and Shell.
The initiative continues a growing trend of oil majors tapping into the global energy transition, including BP’s AUD10 billion investment plan in Australian renewable energy projects, as well as Shell’s announcement to develop, own and operate a 500MW utility-scale battery in the NSW Central West Orana Renewable Energy Zone.
Why does it matter?
The transition to a clean-energy future is a shared goal that will be much easier to attain when companies work together. The consortium represents a valuable collaboration in achieving net-zero emissions.
The electrification of mining vehicles is a significant step in the transition of a hard-to-abate industry, with mobile equipment comprising 40–50 per cent of the sector’s CO2 emissions. Shell plans to be a net-zero business by 2050, which requires reducing emissions from its operations and from the fuels and other energy products it sells. The launch of the consortium shows how innovation and collaboration work hand-in-hand and signals a critical shift for the mining industry.
WESTPAC IN ACTION
Charting ESG progress
Westpac’s 2022 Sustainability Reporting Suite outlines our approach to ESG and charts our progress throughout the year. Highlights include joining the Net-Zero Banking Alliance (NZBA), setting 2030 targets for five emissions-intensive sectors in our lending portfolio and launching our fifth Climate Change Position Statement and Action Plan.
Westpac has been the largest bank lender to greenfield renewable projects in Australia over the past five years and we’ve seen growth in sustainable finance in 2022, with participation in 69 transactions across our institutional bank throughout the year.
New target for real estate subsector
Westpac has released its fifth NZBA target for a subsector of the real estate industry. Focusing on large customers’ office buildings, the target sets a 62 per cent reduction in Scope 1 and 2 emissions intensity (kgC02-e/m2) by 2030 from 2021 levels.
The target boundary is based on availability of reliable emissions data across our commercial real estate lending portfolio. As we continue to address data limitations, we will review the scope of commercial real estate exposures, expand coverage and adjust our target as necessary.
In line with NZBA guidelines, our target covers customers’ operational Scope 1 and 2 emissions, encompassing emissions from the combustion of fossil fuels and electricity consumption for central services such as heating and cooling systems, lifts and communal space lighting. Financing for purchase, refinancing and general business loans to customers are also included in the target.
We have excluded exposures associated with construction and renovation of commercial real estate assets, given emissions associated with these activities are typically considered Scope 3 emissions.
Learn more about Westpac’s leading sustainable finance initiatives.
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