In Short : Australia’s initiative toward a net-zero finance strategy marks a significant step in aligning financial practices with environmental sustainability.
In Detail : Just north of Jamestown in South Australia, 70 kilometres east of the Spencer Gulf and next to a wind farm of nearly 100 turbines, stands the world’s first big battery.
Built in partnership with Tesla and financed and operated by Neoen, a French multinational renewable energy developer, the Hornsdale Power Reserve and other big battery projects could stimulate a homegrown battery industry, contributing many billions of dollars and thousands of jobs to the Australian economy. But for that industry to rise, it will need money.
Australia aspires not only to transition its economy to net zero emissions, but to become a green energy superpower. That means building a host of solar and wind farms, batteries, electric vehicle charging stations, upgrades to the grid and to all kinds of buildings, as well as investments in new technology.
These investments and big infrastructure projects don’t come cheap. Getting to net zero emissions by 2050 requires investment in renewable energy of A$754 billion in power generation alone, according to research by the UTS Institute for Sustainable Futures and funded by Future Super.
The size of the green finance challenge
By 2030, the world will have to invest an estimated US$4.3 trillion a year – roughly the GDP of Japan, the world’s third-largest economy – in climate finance. These financial flows need to grow by 21% a year, on average. Without this enormous increase, the economic transition will not happen in time to avoid the worst impacts of climate change.
The scale of financing means that superannuation funds and other big institutional investors must be involved. They need to know where their money is going, and whether investments are genuine or a case of “greenwashing”. They need certainty that companies in which they invest have solid plans to reduce their climate risk, and the ability to ask the companies questions when they don’t.
But current financial regulation is not set up to support such best practice. To give just one example, default superannuation funds lack the benchmarks – measures of performance assessed by the Australian Prudential Regulation Authority – they need to invest in start-up businesses that are developing clean energy technologies.
Successive Australian governments have been slow to grasp this reality, and we are now playing catch-up with many other countries.
Australia releases its strategy
The Australian government’s Sustainable Finance Strategy, released by Treasurer Jim Chalmers last Thursday, lays solid foundations for this recovery. Yet more needs to be done if Australia is to achieve the strategy’s stated ambition to be a global sustainability finance leader.
The strategy is arranged around three core pillars. The first focuses on creating access to information that is credible, accurate and of practical value. It seeks to ensure markets operate efficiently and money flows to where it is most needed.
From July 1 2024, large Australian companies and financial institutions will have to disclose information about the impacts of climate on their business, the risks climate change poses to their operations, and how they plan to decarbonise.
The disclosure requirements will be based on internationally accepted standards, to ensure Australian and overseas investors can compare data across companies and countries.
The government is also supporting the development of an Australian sustainable finance taxonomy – a set of criteria that enables investors to evaluate whether and to what extent an investment supports sustainability goals.
A taxonomy spells out which investments result in real decarbonisation, and reduces the likelihood of false claims about the sustainability of projects and investments. A government agency will manage the taxonomy, which will start as a voluntary code but may eventually become mandatory.
Large companies will also be required to disclose their net zero transition plan, if they have one. With companies representing 80% of the market capitalisation of ASX 200 companies pledging to achieve net zero emissions, the government wants to ensure their plans are credible. It wants the corporate regulator, the Australian Securities and Investment Commission (ASIC), to set out its expectations of the plans – a welcome step.
The second pillar focuses on building the capabilities of Australia’s financial system regulators to manage risk and to clamp down on greenwashing – the practice of making misleading or deceptive claims about the environmental benefits of activities or assets.
Fighting greenwashing
ASIC Deputy Chair Karen Chester believes the economic cost and loss of investor confidence caused by greenwashing “cannot be overstated”. Her organisation has set out guidelines to help financial institutions identify it. This year ASIC launched its first three legal actions, including one against the local arm of US investment giant Vanguard, and another against Active Super, which allegedly falsely claimed it had eliminated investments, such as coal mining, that posed too great a risk to the environment and the community.
The third pillar concerns government leadership and engagement. Such a large and rapid increase in the scale of private sector finance requires growth in a range of financial assets, including shares, bonds and other kinds of debt.
The government is supporting the development of a green bond market by issuing Australia’s first green sovereign bond in June. These bonds are designed to establish standards for lending and borrowing for all green finance; they will also help the government to fund projects such as electric vehicle charging infrastructure.
Finally, the strategy recognises the importance of collaboration across the Asia-Pacific. If Australia achieves its goal of becoming a regional sustainable finance hub it would not only benefit our national interest but help Pacific Island nations to raise the finance to decarbonise.
What’s missing from the strategy?
The strategy does not focus on green finance skills and competencies. Yet these capabilities, ranging from a basic understanding of what business activities are unsustainable to specialist expertise in the use of scenario analysis to assess climate risk, are essential to the net zero transition.
LinkedIn’s recent Green Skills Report shows that, globally, the finance sector is lagging behind other sectors in building green skills. And Australia ranks only 30th in a list of countries on its share of talent for green finance.
Australia’s financial system must urgently transform itself to meet the climate challenge. If the financing of the transition were a bicycle race, Australia has now caught up to the global peloton. The next step is to take the lead.