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ESG Impact: What you need to know - September 2023

This month we report on Australian companies’ challenges in meeting net-zero targets, some breakthroughs on the way to a circular economy, a gap in funding for biodiversity solutions, plus a trailblazing sustainability linked loan that puts the emphasis on social impact.

POLICY

International Energy Agency updates its net-zero emission scenario 

The International Energy Agency has released an update to its Net Zero Emissions by 2050 Scenario (NZE Scenario), which reflects real-world progress since its 2021 report, Net Zero by 2050: A Roadmap for the Global Energy Sector.

 

The IEA works with governments and industry across the world to shape a secure and sustainable energy future. Its NZE Scenario draws on the latest data and analysis to determine what the global energy sector would need to do to play its part in keeping the 1.5°C goal within reach.

 

The 2023 update reflects significant changes to the energy landscape over the past two years. This includes the post-pandemic economic rebound and the huge growth in some clean energy technologies, as well as the increased investment in fossil fuels.

 

Under the updated scenario, the annual rate of energy efficiency improvements doubles, sales of electric vehicles and heat pumps rise sharply, and energy sector methane emissions fall by 75 per cent. The IEA notes that these strategies combined will deliver more than 80 per cent of the reductions needed by the end of the decade.

 

Why does it matter?

Limiting global warming to 1.5°C remains possible due to the record growth in clean energy technologies. In the IEA’s 2021 report, for example, the share of emissions reductions in 2050 from technologies under development was almost half, and that figure has fallen to about 35 per cent in its updated NZE Scenario.

 

However, momentum needs to increase rapidly in many areas, and remaining on the net-zero pathway will require almost all countries to bring forward their targeted net-zero dates. Staying on target also hinges on a significant increase in investment – in the updated scenario, global clean energy spending rises from USD 1.8 trillion in 2023 to USD 4.5 trillion annually by the early 2030s.

 

The 2023 NZE Scenario outlines a steeper path to achieving net zero emissions by 2050 than the 2021 scenario, and more will need to be done after 2030. However, it also recognises that achieving net-zero energy sector CO2 emissions by 2050 will depend on effective global co-operation.

 

Updated building code increases energy efficiency

From 1 October, all new homes in Australia will be required to meet more stringent minimum standards of accessibility and energy efficiency under the Building Code Board’s 2022 National Construction Code (NCC). The NCC establishes minimum standards for safety, health, amenity, accessibility and sustainability in specific buildings.

 

Announced last year, the update increases the minimum level of thermal performance to the equivalent of 7 stars under the Nationwide House Energy Rating Scheme (NatHERS).

 

The updated NCC also includes the Liveable Housing Standard, which sets out technical provisions to enable dwellings to better meet the needs of the community, including older Australians and people with mobility limitations.

 

Why does it matter?

Residential buildings are responsible for almost 8 per cent of Australia’s energy use, 29 per cent of all electricity use and 11 per cent of greenhouse gas emissions. Changes to the NCC are expected to result in significant carbon abatement and will bring Australia more in line with global standards for the energy efficiency of new homes.

 

Changes to the NCC will make new homes more comfortable to live in, and updates to the minimum energy efficiency requirements are expected to help new homeowners save an average of AUD 183 on their power bills every year.

 

While the latest code was adopted by states and territories on 1 May this year, some states, such as Victoria, have extended the transitional arrangements.

 

TNFD releases final framework

The Taskforce on Nature-related Financial Disclosures (TNFD) has released its final recommendations for business and finance to integrate nature into decision making.

 

The risk management and disclosure framework sets out to identity, assess and manage nature-related financial risks and opportunities. The recommendations are expected to be integrated into accounting standards via the International Sustainability Standards Board (ISSB).

 

As a member of the TNFD Stewardship Council since 2021, the Australian Federal Government has supported and funded the design and development of this global framework. Australia has also commissioned TNFD pilots across five value chains, including critical minerals mining, natural gas extraction, domestically-sourced fresh beef and salmon, property development and building construction, and domestic cultivation of cotton for export.

 

Why does it matter? 

The United Nations estimates that more than USD 44 trillion, or half of the world’s GDP, is moderately or highly dependent on nature and its services.

 

The UNEP FI recently noted that a lack of data on nature-positive expenditure from the private sector also highlights the need for a more robust mechanism for reporting and disclosure. Businesses are more dependent on nature – whether directly or within their supply chain – than had been previously understood.

 

The newly-released framework and its guidance are expected to tackle these issues by improving accountability and transparency globally. The framework is also designed to encourage businesses and financial institutions to shift towards nature-positive actions.

 

CORPORATE

Companies fall short on climate targets

Carbon emission-reduction targets are proving challenging to achieve, with a survey commissioned by Viridios Capital showing one third of Australian companies are struggling to hit the mark.

 

The survey includes responses from more than 200 ESG and sustainability professionals across a range of Australian sectors, including primary industries, manufacturing and construction, wholesale and retail trade, transport and logistics, professional services, and public sector support.

 

Along with insights into progress on achieving carbon targets, the survey respondents also revealed concerns about the Federal Government’s tightening of baselines under the Safeguard Mechanism policy, which requires companies that emit more than 100,000 tonnes of carbon a year to reduce their carbon footprint by almost 5 per cent a year to 2030. Half of those surveyed said they were sceptical that the new baselines for heavy emitters would be achieved.

 

Why does it matter?

The results of the survey are representative of a maturing market. Many of these companies may have started out with strong targets but, when theory is put into practice, they discover that they may have been too ambitious. Concerns around greenwashing may also be causing some companies to reassess the ambition of their climate goals.

 

Research from Climateworks Centre shows almost half of all companies listed on the ASX200 have a net-zero target, and these commitments cover 96 per cent of the total ASX200 reported scope 1 and 2 emissions. As the market continues to mature and climate goals are revised in line with what may be achieved in practice, we can expect these targets to be more informed and achievable.

 

It’s also important to note that the majority of respondents in the Viridios Capital survey believe Australia’s emissions policy is heading in the right direction.

 

Circular economy in the spotlight

The United Nations International Day of Awareness on Food Loss and Waste Reduction on 29 September has put the spotlight on fighting waste through a circular economy.

 

Retail giant Woolworths has partnered with sustainability-focused startup Goterra to tackle its food waste. Goterra’s food waste management system, located at its new facility in Sydney’s Wetherill Park, uses insects called black soldier fly larvae to break down food waste onsite and turn it into feedstock and organic fertiliser.

 

Woolworths will be the new facility’s foundation customer, sending the food waste from its stores across the Sydney region that is not appropriate for hunger-relief charities. Woolworths has been utilising Goterra’s technology in a small-scale trial across its ACT stores since 2020.

 

Meanwhile, Australian engineers from RMIT have recently developed a way to make concrete that is 30 per cent stronger by converting waste coffee grounds into biochar using a low-energy process.

 

The extraction of natural sand typically used in concrete has a significant impact on the environment and the use of coffee grounds presents a win-win by replacing a portion of the sand while making concrete even stronger.

 

Why does it matter?

In October last year, environment ministers across the country, led by Federal Minister for Environment and Water Tanya Plibersek, agreed to work with the private sector to design out waste and pollution, keep materials in use and foster markets to achieve a circular economy by 2030.

 

Woolworths’ work with Goterra presents an innovative way to address food waste. And, with Australia generating 75 million kilograms of ground coffee waste every year – most of which goes to landfill – its conversion into building materials is a welcome addition to the circular economy.

 

Approximately 50 billion tonnes of natural sand are used in construction projects globally every year, and the coffee-grounds innovation may help the construction industry to explore alternative, sustainable raw materials.

 

WESTPAC IN ACTION

New sustainability linked loan targets social impact

Australian Unity has sealed an innovative sustainability-linked loan (SLL) deal with Westpac, connecting financing to a framework that puts a value on its social impact.

 

The AUD 50 million loan creates an incentive for the health, wealth and care group to increase its community and social value. It is aligned to the group’s performance against agreed key performance indicators and is measured by its Community and Social Values Framework (CSV).

 

Australian Unity’s CSV framework, devised with not-for-profit consultancy Social Ventures Australia, assessed the group’s social impact to be valued at AUD 1.76 billion in the 2023 financial year. The contribution is evaluated over three priority areas: lifelong wellness, economic empowerment, and strong communities.

 

While the majority of deals in the ESG space target environmental goals, this SLL focuses on the social aspects. “We haven’t dismissed the importance of environment, but as a community-based organisation we were formed to help people solve the issues they face in their everyday lives,” says Adam Vise, Group Treasurer and General Manager, Strategy and Impact at Australian Unity. “Having this central purpose meant we had an attraction to the ‘S’.

 

“Australian Unity and Westpac have laid the first brick in the road of a wellbeing capital market – completely private sector, completely commercial, and completely scalable at delivering social value,” adds Vise. “There’s an opportunity for capital to flood into this, just as it is to the clean energy transition.”

 

Westpac economists discuss commodities in transition

In a recent video, Westpac economists Justin Smirk and Elliot Clarke discuss commodities in transition, focusing on the global supply and demand for coal and LNG. China’s growing EV fleet, Justin says, will likely make a “meaningful dent in their import of crude oil” and impact “global demand for crude oil in that space”. While the growth in EVs will also increase the demand for coal, it will lead to lower carbon emissions compared to an ICE fleet. Meanwhile, in the absence of regional carbon pricing, coal fired generation will remain the main option for developing Asia.

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