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ESG Impact: What you need to know - February 2024

This month we report on how the latest boom in battery industry activity could have exponential impact, new Australian Government support for the critical minerals industry, the surge in sustainable bonds, and more.

POLICY

World Economic Forum puts climate in the spotlight

Climate change is gaining greater attention from the World Economic Forum (WEF) with its annual meeting in Davos including the theme of “A Long-Term Strategy for Climate, Nature and Energy”.

 

Discussion points from this year’s Davos meeting included a need for greater policy and decisive leadership around energy efficiency, the importance of forests in carbon sequestration, the role of artificial intelligence in climate adaptation, and the need for equitable climate transitions.

 

The importance of WEF’s climate focus was underscored by new data released by  Copernicus Climate Change Service this month that points to an escalation of climate change, with January 2024 the warmest on record.

 

Why does it matter?

Climate change as a material issue has garnered limited attention from WEF in recent times. The focus at Davos, however, follows the release of its Global Risks Report, which shows that the top four global risks over the next decade are environmental in nature: extreme weather events; critical change to Earth systems; biodiversity loss and ecosystem collapse; and natural resource shortages. These top four risks also highlight the interrelated impacts of climate change.

 

The Global Risk Report calls on leaders to rethink their response to global risks like climate change. This includes fostering greater research and development on climate modelling and technologies with the potential to speed up the energy transition. With 2024 beginning with a record-breaking month for global temperatures, there’s no time to waste.

 

Supporting the market for critical minerals

The Australian Government has released the Critical Minerals Prospectus to highlight investment opportunities and the benefits of building critical mineral businesses.

 

Critical minerals, such as lithium, cobalt and copper, are vital for the global transition to green technology, and the prospectus highlights 52 investment-ready projects across the country. 

 

The Government’s Critical Minerals List, which included 24 critical minerals in 2019, was expanded to 30 minerals in December last year. Nickel was added to the list this month, giving Australia’s nickel companies an opportunity to access billions of dollars in Commonwealth funding. 

 

Why does it matter?

Australia has some of the largest recoverable critical minerals deposits in the world, ranking in the global top 10 for 10 individual minerals. As essential components in clean energy technologies like wind turbines, solar panels and electric vehicles, demand for these minerals is increasing as the clean energy transitions gather pace. 

 

Data from the International Energy Agency’s Critical Minerals Market Review 2023 shows that record deployment of clean energy technologies is driving huge growth in critical minerals markets. The market size of key energy transition minerals doubled over the past five years, reaching USD320 billion in 2022, which is similar to the market size for iron ore mining.

 

Australia is a global leader in resource project development and Australia spent more than AUD 4 billion on mineral exploration in 2022. 

 

The new prospectus points to projects ripe for funding across mining and processing, which also may lead to more jobs for Australians. In the long term, high-value critical mineral exports are predicted to fuel economic growth and play a vital role in the future of clean energy.

 

Investment to charge batteries

February was a bumper month for batteries with large-scale projects proposed, financing closed on major developments and industry players exploring storage solutions that were once thought out of this world.

 

UK energy storage developer Pacific Green has proposed its second grid-scale energy storage project in Australia, with plans for a 1GW, 2.5GWh big battery project in Portland in Victoria’s south-west. Neoen, the developer of the 412MW Goyder South wind farm near Burra in South Australia, has reached financial close on the second tranche of the project and on the 238.5MW/477MWh Blyth Battery.

 

Meanwhile, AGL is currently trialling a nickel-hydrogen battery using a chemistry that has almost exclusively been used in aerospace applications until recently. Nickel-hydrogen batteries can cycle 30,000 times and up to three times a day, with very low degradation of their energy storage capacity over time. Lithium-ion batteries degrade more quickly. Nickel-hydrogen technology was first adapted for grid, industrial and commercial applications in 2020.

 

Why does it matter?

As more renewables enter the grid, energy storage will be vital to ensuring a stable and consistent supply. As of June 2023, 34 large-scale batteries valued at AUD 4.1 billion in investment were under construction in Australia. The country also has a growing consumer market for batteries with installation linked to solar systems growing by 55 per cent from 2021 to 2022.

 

In states like South Australia, the rapid transition to renewable energy and the growth in battery storage are already impacting the viability of diesel generators. This month, French electricity giant Engie announced it will close two diesel generators in the state years ahead of schedule. 

 

A new report from sustainability research firm Rocky Mountain Institute also points to a domino effect in battery adoption that cascades from country to country and from one sector to the next. It notes that this will be instrumental in abating transport and power emissions and may drive the world more than 60 per cent of the way towards a zero-carbon energy system. 

 

Batteries play a vital role in Australia’s energy transition. As this recognition continues to grow, so too will the investment.

 

CORPORATE

Surge in sustainable bonds 

Sustainable bond issuance is expected to hit close to USD 1 trillion this year, according to data from S&P Global Ratings. The credit rating agency predicts the issuance of green, social, sustainability and sustainability-linked bonds (GSSSB) to rise at a similar pace to that of conventional bonds for the second consecutive year and expects continued diversification within the market.

 

S&P predicts green bonds to continue their dominance in GSSSB markets this year, buoyed by increased demand for environmental projects across the globe. Green bond issuance expanded by 10 per cent year-on-year in 2023, reaching a total of USD 575 billion.

 

On the sustainability-linked loan front, Bloomberg expects to see a pick-up in the volume of issuances in Asia Pacific (ex-Japan), with approximately US$27 billion set to be due across the region. The increase in volume may offset recent declines in issuances, which were exacerbated by growing borrower concerns about greenwashing risks.

 

Sovereign issuance is expected to grow more than any other issuer type, largely thanks to green bonds, with record figures stemming primarily from Europe and the Asia-Pacific. China is also predicted to have more internationally aligned green bonds due to updates made to its green bond standard, which bring it in line with international standards such as ICMA.

 

Why does it matter?

The GSSSB market plays a crucial role in financing sustainable projects and initiatives. Further growth may be underpinned by increased adoption of sustainable taxonomies, with design of the proposed Australian sustainable finance taxonomy currently underway. 

 

Greater policy support for clean-energy solutions, such as green hydrogen, biofuels and carbon capture, may also drive growth in both private and public investment sectors.

 

Data from S&P Global Ratings shows that new sustainable bond types are also poised for growth. These include blue bonds, which are issued to finance marine and ocean-based projects with positive climate benefits, and transition bonds, which are geared towards issuers in hard-to-abate sectors to support climate transition goals. 

 

In fact, transition finance is expected to fuel growth in Asia Pacific issuance, with Moody’s outlook for 2024 predicting steady growth for the region.

 

Adding to the increase in global sovereign issuance, the Australian Government has also announced plans to enter the sustainable bond market this year, with timing planned for between April and June.

 

WESTPAC IN ACTION 

Sustainable Debt Summit approaching

Taxonomies, reporting and nature-related risks will be high on the agenda at this year’s KangaNews Sustainable Debt Summit, which will be held on 19 March at the Hilton in Sydney. A leading event in the Australian green finance calendar, it brings together views from a wide range of issuers, investors and intermediaries. 

 

With a strong track record of supporting corporations in their transition to a more sustainable future, Westpac will be a sponsor of the summit. Eliza Matthews, who has led Westpac’s sustainable finance team since 2021, will be moderating a panel discussion that focuses on credibility in transition finance and labelled instruments. Elliot Clarke, Head of International Economics at Westpac, will also join as a panellist to discuss the economics of climate action and sustainability. 

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