Investors want COP26 global consensus to tackle climate risk

This opinion piece was originally published by the Australian Financial Review on October 31, 2021.

The future stability of the global financial system depends on ambitious targets, and clear pathways to accelerate the carbon transition, emerging out of Glasgow.

The task facing UN climate talks in Glasgow is a gargantuan one. Limiting temperature increases to 1.5 degrees in line with the 2015 Paris Agreement will require global consensus, ambition and commitment at COP26 to accelerate the transition to clean energy and avoid the worst impacts of catastrophic climate change.

The future stability of the global financial system depends on governments, business and investors working together to address climate risks through ambitious targets, clear and credible pathways, streamlined disclosure frameworks and strong green investment.

Investors are acutely aware they are operating in an environment long on commitment but often short on detail.

As representatives of long-term investors, we have seen a clear trend of companies in exposed industries adopting net zero targets and disclosing pathways towards decarbonising their businesses.

Investors will continue to play a critical role in holding companies to account on their climate aspirations to ensure they have developed realistic and tangible plans to achieve these.

Research by the Australian Council of Superannuation Investors shows that companies with more than $1.5 trillion in market capitalisation have set net zero commitments. When you add those with carbon-neutral targets, this increases to 90 companies covering 72 per cent of the ASX200 market capitalisation, or $1.65 trillion.

Investors are acutely aware they are operating in an environment long on commitment but often short on detail.

Boral, BlueScope, Orica, Alumina and Beach Energy are among the companies in exposed sectors that have embraced net zero 2050 targets in recent weeks.

Importantly, these are being linked to increasingly ambitious shorter-term targets for 2030. Seventy companies in the ASX200 have set medium-term targets between 2025 and 2040, including 22 major companies that set net zero by 2030 or earlier. These include Ampol (2040), Seven Group Holdings (2030), Blackmores (2030), Dexus (2030), JB Hi-Fi (2030), Worley Limited (2030) and Mirvac (2030).

Keeping up with climate strategies

This trend shows that Australian companies are responding as the global market moves towards a low-carbon economy. For companies in exposed sectors, regular updates tracking climate strategies will be a critical source of information for long-term investors.

Companies will need to provide high levels of transparency around their progress on reducing carbon emissions, and investor scrutiny will be vital to make sure the commitments are being delivered on.

Increasing policy certainty and stability in Australia will attract investment capital. Global capital markets have moved and are looking for net zero investment opportunities. Action on climate change is an enormous opportunity for Australia.

The Investor Group on Climate Change estimates that strong climate policies will unlock more than $130 billion in fresh investments by 2030. The Business Council of Australia estimates that Australia stands to reap an economic dividend of $890 billion and 195,000 jobs over the next 50 years.

Need for more ambitious 2030 targets

In the lead-up to COP26, global economies have been opening the door to new opportunities for investment driven by accelerated global emissions’ reduction commitments. The federal government’s 2050 net zero commitment is welcome, but investors will be looking for more ambitious 2030 targets in line with the Paris Agreement, to support investment in the transition to a low carbon economy.

Failing to keep pace with international developments presents investment risk and could see capital allocated to other markets.

Paris-aligned emissions reductions by the end of the decade will offer a strong signal to capital markets and attract investment in clean industries and infrastructure.

Superannuation funds are invested across the economy and the country’s transition to a decarbonising economy affects the financial outcomes of super fund beneficiaries.

COP26 is not an end point for the investors, companies and policymakers who are seeking to address the financial risks posed by climate change. The summit will require us all to re-evaluate the policies and targets we have set and seize the competitive advantages that decarbonisation will bring.

It is imperative that we promote a financial system that can adapt to the pace and scale of change and provide a more sustainable economy for generations to come.

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