Advance Australia, Finally

Despite suffering severe impacts from climate change, Australia remains married to coal, but alternative energy opportunities are emerging.

During the 2019-2020 Australian bushfires, more than 24 million hectares of land was burnt and 33 people died, followed by a further 450 fatalities from illnesses linked to smoke inhalation. Earlier this month, extensive flooding on the country’s east coast killed 20 people and inundated thousands of homes. Visiting flood-affected areas, the country’s Prime Minister, Scott Morrison, said Australia was “becoming a harder country to live in because of these natural disasters”.

Australia – along with the Pacific Islands and Southeast Asia region ­– is in one of the most vulnerable regions in the world to climate change, says Alvin Chandra, Programme Management Officer – Climate Change with UN Environment Programme. “Many of the communities dealing with this recent flooding have already had to deal with a range of cascading climate events in recent years. These droughts, bushfires, powerful storms and heat waves amplify the scientific evidence predicted by Intergovernmental Panel on Climate Change reports that we are already living in a changed climate.”

Research by scientists at Australia’s Commonwealth Scientific and Industrial Research Organisation (CSIRO) found that the annual area being burned by fire across Australia is increasing, three out of the four extreme forest fire years since records began 90 years ago have occurred since 2002, and the fire season is extending, moving out of spring and summer into autumn and winter. These trends, the researchers say, are almost entirely due to Australia’s increasingly severe weather and are consistent with “predicted human-induced climate change”.

The Australian government has been criticised at home and abroad over its climate policies. The country was recently described as a “holdout” in setting emissions reduction targets by United Nations Secretary General António Guterres – a description that caused furore in Australia. This explainer looks at the state of play in Australia and the role of investors in accelerating its transition to a low-carbon economy.

What are Australia’s stated net zero goals?

Australia adopted an economy-wide target of net zero emissions by 2050 in the run-up to COP26. To achieve this, it committed to seven low emissions technology goals, which it describes as “ambitious but realistic”. Its interim target is to reduce greenhouse gas (GHG) emissions to 26-28% below 2005 levels by 2030. The country says based on 2021 emissions projections it is on track to reduce emissions by up to 35% below 2005 levels by 2030.

Climate Action Tracker (CAT) argues that Australia does not have a net zero target, arguing the federal government’s mid-century goal is not backed up by concrete commitments. It rates Australia’s performance as “highly insufficient”, criticising the government for ramping up its post-pandemic “gas-fired recovery”, refusing to increase its 2030 domestic emissions target, and not being on track to meet its current target. “The government appears intent on replacing fossil fuels with fossil fuels: the 2021-22 budget allocates large sums (A$52.9 million) to gas infrastructure projects and a gas-fired power station (A$30 million), with no new support for renewable energy nor electric vehicles.”

Under Australia’s current policies, its emissions will continue to rise and are consistent with more than 3°C warming, says CAT. Australia needs to set a more ambitious target for emissions reductions, establish associated policies, and provide finance to support others to get a better rating.

What impact does Australia’s coal mining industry have on its goals?

Australia is one of the world’s largest energy exporters, with 85% of the energy it produces exported. It is among the world’s largest exporters of coal and liquefied natural gas. At COP26 in Glasgow, Australia refused to commit to phasing out coal.

The Federal Minister for Resources and Water, Keith Pitt, says Australian coal “will not be staying in the ground while it continues to provide thousands of jobs and bring significant economic benefits both here and across the world”. Australia accounts for about 8% per cent of the world’s thermal and metallurgical coal production, which is exported to more than 25 countries including the UK, Germany and New Zealand, totalling around A$50 billion annually in exports. A slow-down in China’s import of Australian coal led to a sharp decline in the value in 2020 and 2021, falling to A$39.17 billion in 2021.

Australia has the highest emissions per capita in the world from burning coal for electricity, according to analysis by Ember, a non-profit climate and energy think tank. The average Australian emits five times more CO2 from coal power than the average person globally.

Ember noted the “major divergence” on coal at COP 26. The position in Australia, which needs to phase-out coal by 2030 to meet 1.5C targets, “showed little signs of changing”. While developing Asian countries were “thinking big” about coal phase-out, the positions of Australia, Japan and Korea are “embarrassing and simply untenable”, says Dave Jones, Global Programme Lead, Ember.

Coal-fired power generation could be phased-out by 2043, according to the Australian Energy Market Operator (AEMO). The prediction is based on a rapid transformation of the national electricity market with investment in renewable generation, energy storage, back-up generation and transmission as coal plants are retired. Around A$12 billion of investment would be required in “substantially increased” battery and pumped-hydro storage, hydrogen or gas-fired generation for peak demand, complemented by a market that “incentivises energy users to adjust demand based on system conditions”, said AEMO.

What is Australia doing to increase use of non-fossil fuel energy?

Renewable energy sources accounted for 7% of Australian energy consumption in 2019-20, with renewable electricity generation more than doubling during the past decade. Combustion of biomass such as firewood and bagasse (the remnant sugar cane pulp left after crushing) remains more than 40% of all renewable energy consumption in Australia.

In 2020, 24% of Australia’s total electricity generation was from renewable energy sources, including solar (9%), wind (9%) and hydro (6%). Small-scale solar generation grew by 27% in 2020, and by an average of 28% per year over the past decade. Wind generation grew more slowly while hydro power output has fluctuated around a fairly consistent level according to rainfall and market conditions, losing predominance as generation sources diversified.

Recently, large-scale solar generation has begun rapid expansion, growing from negligible levels before 2016 to 3% of all Australian electricity generation in 2020, representing a four-year growth rate of 1,268%.

Mike Cannon-Brookes, co-founder of software company Atlassian and the third-richest person in Australia, made an A$8 billion bid in partnership with Canadian asset manager Brookfield to buy AGL, Australia’s largest electricity company. His aim is to shut AGL’s coal-fired power plants and replace them with renewable infrastructure based on solar and wind. While the initial bid in February 2022 was knocked back as too low, Cannon-Brookes said negotiations were ongoing. If successful, it would become the largest decarbonisation project in the world.

Cannon-Brookes, along with Australian mining mogul Andrew Forrest, has funded Sun Cable, a project to deliver electricity from a giant solar farm in northern Australia to Singapore through a submarine cable.

Where does Australia stand on climate disclosure regulation?

In November 2021, the Australian Prudential Regulation Authority (APRA) released its final prudential practice guide on climate change financial risks, which is aligned with the recommendations from the global Task Force on Climate-related Financial Disclosure (TCFD).

“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws or adjustments in asset values, but they don’t always have a good understanding of how to respond,” said APRA Chair Wayne Byres on release of the guide. The guide is a “direct response to their request for more clarity about regulatory expectations and examples of better industry practice”.

While APRA regulates financial institutions, corporate adoption of TCFD reporting has remained voluntary to date. In the absence of mandated reporting, Australian investor networks – CDP, IGCC and the Principles for Responsible Investment – are taking matters into their own hands, releasing a plan of the steps financial regulators and the Australian government can take to adopt mandatory financial disclosure for climate change risks.

The final recommendations of the TCFD and growing pressure by Australian regulators has resulted in a significant increase in voluntary disclosures by companies and financial institutions, with 60 companies in the ASX200 adopting the TCFD framework. However, the investor groups say the quality and consistency of these company disclosures is severely lacking, leading to the under-pricing of climate risks in the market. IGCC has released a guide for investors on the questions they need to ask corporates about their climate transition plans.

What are the opportunities for investment in climate-related initiatives in Australia?

Investors have many options to deploy capital in Australia on climate-science aligned projects and assets, says Fergus Pitt, spokesperson for Investor Group on Climate Change (IGCC). The group represents Australian and New Zealand institutional investors with total assets under management of over A$3.6 trillion in Australia and New Zealand and A$33 trillion worldwide.

At the more mature end, investment is continuing in decarbonising the energy system, energy efficiency in buildings, green transport infrastructure, and sustainable agriculture. Investors are also deploying venture capital into earlier stage higher risk/return opportunities such as nature-based waste/resource recovery, and materials technology.

“That said, the evidence clearly shows that climate-aligned investment needs to accelerate, and that takes a supportive policy environment,” says Pitt. “Currently, the energy market is badly distorted by subsidies to fossil fuel projects. Australia’s climate targets being significantly behind international peers is a headwind to local projects and companies competing in global capital markets. It is progress that the federal government is supporting some resilience investment, and has acknowledged a net zero 2050 target is necessary, but stable and bi-partisan support for getting the country onto a safer climate trajectory by 2030 is absolutely necessary as well.”

Aware Super, one of Australia’s largest superannuation funds, with A$125 billion AUM, is transitioning its portfolio to a low-carbon economy to reach net zero by 2050, incorporating portfolio-wide short-, medium- and long-term targets, advocating for a just transition, stronger policy and regulatory support. The fund’s strategy includes a commitment to increasing investments in appropriate clean energy and low carbon opportunities, divestment of thermal coal miners and engagement with fossil fuel companies to set net zero targets. The fund has allocated A$1 billion in renewable and low-carbon technologies in its infrastructure and private equity portfolio.

Are there adequate environmental investments at scale for Australian pension funds?

There are climate-aligned opportunities to profitably deploy hundreds of millions of Australian dollars per project, and billions collectively, says Pitt. However, large institutional investors do have the AUM to deploy significant funds to global opportunities where the investment case supports that. AustralianSuper recently invested £290 million (A$515 million) to form a 50:50 joint venture with British Land on the Canada Water Masterplan, a sustainable regeneration project in London.

“Commensurately, rapid decarbonisation and adaptation also requires up to billions of dollars per deployment,” says Pitt. “In a promising sign, we are seeing movement from the private sector and regional governments to set up initiatives like renewable energy zones that will help produce the necessary scale, but as with this whole matter, more is needed.”

The NSW Renewable Energy Zones (REZs) are designed to unlock a “significant pipeline” of large-scale renewable energy and storage projects, while supporting up to A$20.7 billion of private sector investment in New South Wales and over 5,000 construction jobs at their peak, according to the NSW Government.

The zones are described as “modern-day power stations” that combine renewable energy generation such as wind and solar, storage such as batteries, and high-voltage poles and wires to deliver energy to the homes, businesses and industries. By connecting multiple generators and storage in the same location, REZs capitalise on economies of scale to deliver cheap, reliable and clean electricity.

How else are investors accelerating decarbonisation in Australia?

Private sector initiative Climate League 2030, whose members have combined assets of A$919 billion, is working to reduce Australia’s annual GHG emissions by at least a further 230 million tonnes from those projected for 2030. The initiative is coordinated by the IGCC and assisted by foundational supporters Aware Super, Cbus, IFM Investors and the Queensland Investment Corporation.

Climate League 2030 participants are required to take at least one new action each year that contributes to reducing Australia’s climate pollution. Among its members, independent asset manager Pendal Group is actively engaging with portfolio companies both directly and in collaboration with other industry actors to reduce emissions. It is one of the Climate Action 100+ members engaging with Australian oil and gas producer Santos to reduce emissions across their value chain. Pendal is also part of the CA100+ Oil and Gas Working Group that provides additional support to sector-related engagement, so investors have informed company engagements with oil and gas companies to meet the initiative goals.

Unisuper, a superannuation fund, led Climate Action 100+’s engagement with the steel producer BlueScope. Steel is a hard-to-abate industry and during 2021, BlueScope announced a net zero emissions by 2050 goal and an initial capital allocation of A$150 million over five years to support mid- and long-term climate ambitions, while exploring renewable hydrogen and options for low-emissions steelmaking. “It has also set an additional non-steelmaking target for Scope 1 and 2 emissions intensity reduction of 30% by 2030,” explains Pitt. “That built on existing progress by BlueScope, and we believe the engagement by UniSuper and other Climate Action 100+ members was one of the factors in BlueScope accelerating their decarbonisation.”

IGCC points out that through initiatives such as Climate League 2030 the private sector is voicing its support for the rapid reduction of Australia’s greenhouse gas emissions. Such private sector action, which includes winding down investments and engagement with corporates, needs to be matched by government policy.

“Australia’s most important and mainstream investors are looking for an Australian government policy target of 45% emissions reduction target by 2030,” says IGCC CEO Rebecca Mikula-Wright. “These investors know their members are experiencing extreme weather events themselves and want their money to be invested in line with the best climate science and a 1.5C future.”

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