Originally published in Investment Magazine (April 2017)
The wave of uncertainty ushered in across the globe recently is likely something investors will need to get used to. One of the many areas this ‘new normal’ has impacted is discussions on climate policy in Australian and across the globe. What remains clear for investors is that if Australia is going to transition smoothly to a low-carbon economy, policy certainty and clarity are required.
ACSI engages with Australia’s top listed companies on behalf of our 35 Australian and international members, which collectively manage in the order of $1.5 trillion on behalf of their beneficiaries, including over eight million Australian fund members and retirees.
One of our major engagement priorities is to find out how companies with significant exposure to these risks are planning for medium-to-long term climate change scenarios to enhance the sustainability of their businesses. There is a clear need for greater transparency from Australian companies on how they factor these issues into their strategic planning, risk management and capital allocation decisions.
This is vital. As the Investor Group on Climate Change (IGCC) said in its Investor Briefing on The Taskforce on Climate-related Financial Disclosure at the end of last year, ‘the market has the capacity to absorb the significant structural adjustments required to decarbonise the economy over time if there is a reasonable level of carbon risk disclosure. Inadequate disclosure could lead to sudden movements of capital or the abrupt devaluation of assets with the potential to impact the broader market.’
We’ve seen some marked improvements in these areas in recent years, as companies come to grips with the realities of global warming. An increasing number of companies are articulating their position on climate change, as well as the steps taken to assess and mitigate specific climate risks.
Now, in a welcome intervention, APRA has also firmly put the case for climate change risk in the investment process.
In a speech in February, APRA Executive Board member Geoff Summerhayes made it clear that climate risk can no longer be seen as a future, or non-financial risk, adding, ‘Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.’
Momentum continues to build, but as a nation, we need to do more.
The federal government must clarify our national energy and climate policy. Even putting aside the overwhelming proof of climate change, and the modelling which shows dire consequences for the earth’s environment, the lack of a clear policy framework for managing carbon and energy impacts is undermining investment. That goes for renewable energy, as well as coal and gas-related infrastructure beyond 2030.
We keenly anticipated December’s release of the terms of reference for the 2017 Climate Policy Review, and were disappointed when an emissions intensity-reduction trading system for the electricity sector was taken off the table.
We’ve written, as has the IGCC, to Australia’s political leaders, calling on them to come together to agree to a long-term climate change policy framework. In line with Australia’s commitments under the Paris Agreement, that framework must integrate the energy sector and emissions reduction goals.
And it’s not just us – there is growing urgency in calls by business, industry, the energy sector, environmental and social groups for policy clarity.
The 2017 Climate Policy Review Terms of Reference is an important opportunity to agree a way forward. All of us, whether in government, industry or investment, seize it as a genuine opportunity to engage productively to deliver the policy certainty vital for environmentally sustainable economic growth. Mechanisms such as an emissions intensity reduction trading regime should be part of the discussion.
We in the investment sector are calling on government to develop policy which includes appropriate pricing of climate risks which will lead to a more sustainable allocation of capital.
Louise Davidson, CEO, Australian Council of Superannuation Investors