ESG Impact: What you need to know - July 2022
In our July wrap of the latest ESG developments, Westpac Institutional Bank’s team of ESG experts explain what’s happening domestically and locally, why it matters, and what it means for you.
Assessing natural impact
How does nature affect immediate financial performance? This is a question many companies are grappling with, according to findings of the United Nation’s Nature-related Disclosures report.
The report assesses the understanding and expectations of 19 companies operating in various high-risk sectors following the release of the beta disclosure framework from the Taskforce on Nature-related Financial Disclosures (TNFD). A market-led initiative, the TNFD was launched in 2021 to develop a framework for organisations to report and act on evolving nature-related risks and opportunities.
The UN report shows companies are still missing the information needed to understand how nature affects both their immediate financial performance and the longer-term financial risks that may arise from their interactions with the natural environment.
Why does it matter?
Nature is a vital element of an organisation’s overall ESG equation, but the risks and opportunities it presents are relatively new additions to environmental considerations. The World Economic Forum estimates that more than half of the world’s economic output – USD44 trillion of economic value generation – is moderately or highly dependent on nature. Its also ranks biodiversity loss as the third greatest risk facing the globe over the next decade, behind climate action failure and extreme weather.
Many companies face a challenging trade-off when building critical infrastructure to aid decarbonisation, as natural habitat may be destroyed in the process. Understanding and evaluating nature-related impact via a risk and disclosure standard may help to strike the balance, and the UN’s Nature-related Disclosures report provides a basis for the TNFD to improve and strengthen the first version of its beta framework.
BP takes major stake in green hydrogen hub
British oil and gas major BP has acquired a 40.5 per cent stake in the AUD$30 billion Australian Renewable Energy Hub (AREH), a vast solar and wind project in Western Australia developed by partners Intercontinental Energy, CWP Global and Macquarie.
Set on a 6,500 square kilometre site in the Pilbara mining region, the project – which remains subject to approval – has the potential to be one of the biggest renewable power hubs in the world. At full capacity, it aims to produce up to 26GW of combined solar and wind power generating capacity. This is the equivalent of around a third of all electricity generated in Australia in 2020.
Why does it matter?
The deal marks a significant step in BP’s transformation from one of the world’s oldest oil producers to one of the largest integrated energy companies. The company has pledged to build or acquire 50GW of renewable power by 2030 as it seeks to cut emissions to net zero by 2050, and hydrogen is a key pillar of its energy transition.
The AREH project is expected to produce about 1.6 million tonnes of green hydrogen or 9 million tonnes of green ammonia a year for exports and domestic use, including the supply of renewable power to mining projects in the WA region. As a provider of fuel to hard-to-abate sectors, the AREH project will also see BP play a valuable role in helping its customers address their own abatement challenge.
‘Managed phaseout’ produces better climate outcomes
Financial institutions play an important role in funding the decarbonisation of the economy, but reducing their exposure to high-emitting clients and assets will not directly decrease real-world greenhouse gas emissions. This is a key finding of a new report from the (GFANZ), which proposes a “managed phaseout” as a net zero-aligned approach for the operation and financing of high-emitting assets with clear commitments around their retirement.
A global coalition of financial institutions committed to accelerating the transition to a net-zero global economy, the GFANZ recommends that financial institutions adopt an approach to support client transition and ensure responsible stewardship of high-emitting assets, which will lead to better climate outcomes.
Why does it matter?
Financial support is critical for energy transition and divestment from high-emitting industries and assets will not aid the bigger picture of decarbonising the economy. As the GFANZ report illustrates, a managed phaseout can allow financial institutions to stay engaged with companies in high-emitting sectors and support them through their transition to net zero.
It can also promote a just transition and the continuity of critical services, with the provision of finance conditional on plans to cease operation of high-emitting assets within a clear timeframe. Many high-emitting assets need to be operated and financed in the short term while greener technologies are deployed.
The GFANZ report also notes that divestment may prolong the life of high-emitting assets or worsen their GHG emissions profile, as they may be transferred to companies or countries with less climate ambition or disclosure.
Busting EV myths
Electric vehicle sales accounted for just 2 per cent of the Australian car market in 2021, compared with a global average of 9 per cent. While high prices, a limited range and a lack of government incentives have hampered growth, there’s also a myth that EVs are just as bad for the environment as internal combustion engine vehicles (ICEVs ) if the electricity is drawn from fossil fuel generation. However, battery powered EVs produce zero exhaust emissions and, even if charged by coal-fired electricity, they generate lower net emissions than ICEVs.
Why does it matter?
As electricity grids transition to renewables, emissions associated with EV charging will continue to reduce and, when managed correctly, EVs can increase the reliability of the electricity grid. Some of the emerging technology in EVs coming to Australia enables battery discharging, which means that they can put electricity back into the grid during times of peak demand. EV batteries are also repurposed or recycled to power vehicle manufacturing equipment and small electrical grids in the event of a blackout, so they have a longer life than just in a vehicle.
Westpac is a member of Australia’s Electric Vehicle Council, which aims to accelerate the electrification of vehicles for a more sustainable country, and the bank’s new car loan offer aims to fast-track the take-up of hybrid and electric vehicles in Australia. The annual loan rates start from 4.99 per cent, with customers able to borrow between AUD10,000 and AUD100,000 to finance their eligible hybrid or electric vehicle purchase.
WESTPAC IN ACTION
Westpac backs advanced battery system
Westpac has co-financed Edify Energy’s ground-breaking battery energy storage system, located in renewables rich south-west NSW. The 150MW/300MWh battery energy storage system is supported by offtake agreements with Shell Energy and EnergyAustralia and will provide power system support services to facilitate additional renewable generation in the region.
Designed and developed by Edify Energy, the energy storage system deploys Tesla’s Megapack technology and will be the most advanced battery system in the National Electricity Market. Equipped with grid forming inverters, it will operate in a similar manner to a conventional generator and can power 40,000 homes for 2 hours.
One of the greatest impediments to the grid is the extra transmission required to deliver electricity around Australia to provide the balance and support traditionally provided by coal-fired power stations. Locating battery storage systems in renewable energy zones in centralised areas across state boundaries provides more stability and greater grid certainty for the regions.
This project is the largest approved grid-forming battery in the country and supports the development of regional NSW through the creation of jobs, opportunities for upskilling and an economic injection in the local area.
Westpac joins the Net-Zero Banking Alliance
Westpac has joined the Net-Zero Banking Alliance (NZBA) as part of its commitment to supporting the transition to a carbon-free future.
Convened by the UN Environment Programme Finance Initiative, the industry-led Alliance was launched in April 2021 by 43 founding members and now includes 114 banks from 41 countries. Representing approximately 40 per cent of global banking assets, the NZBA’s to support and accelerate the implementation of decarbonisation strategies.
Each signatory bank is committed to aligning their lending and investment portfolios with net-zero emissions by 2050. The NZBA’s commitment and guidelines also require banks to set 2030 and 2050 net-zero targets that align with 1.5°C transition pathways, as specified by science-based climate scenarios.
Westpac’s approach is guided by science and prioritises some of the most carbon intensive sectors in our lending portfolio. Our sectorial targets include:
- Thermal Coal Mining: zero lending exposure by 2030 to companies where more than 5 per cent of revenue is coming directly from their production and sale of thermal coal.
- Upstream Oil & Gas: a 23% reduction in scope 1, 2 and 3 absolute financed emissions by 2030.
- Power Generation: an emissions intensity target of 0.10 tCO2e/MWh by 2030.
- Cement Production: an emissions intensity target of 0.57 tCO2e/tonne of cement by 2030 with companies that produce clinker in-house captured within the scope of this target scope.
Westpac Institutional Bank Chief Executive Anthony Miller says the bank is committed to playing its role in the nation’s transition to a lower carbon future.
“To support this, we continue to invest in our frontline bankers’ ESG capability and build sustainable finance solutions,” he says. “Joining the NZBA is a clear commitment to improve our climate performance, help customers transition, and collaborate on initiatives, policies and disclosures that achieve net-zero.”
©2022 Westpac Institutional Bank is a division of Westpac Banking Corporation (‘Westpac’) ABN 33 007 457 141 AFSL and Australian credit licence 233714.
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