Australia's economic transition: from carbon intensity to climate resilience

Note: this piece originally ran in Responsible Investor on 7 June 2024 (Subscription Only).? Comment: Australia's economic transition - from carbon intensity to climate resilience ( responsible-investor.com )

Australia’s challenges with climate change are well-known. This is a hard-fought transition. As a carbon-intensive, trade-exposed economy, this reality shouldn’t be surprising.

Australia is one of the world’s largest producers and exporters of coal, gas, and iron ore. But the story is more complex than just fossil fuels. With some of the world's premier wind and solar capacities, alongside vast potential for hydrogen and substantial reserves of lithium, cobalt, and copper, Australia holds pivotal components for scaling the renewable energy supply chain.

For most of the past decade, a political debate, often referred to as the ‘Climate Wars’, paralysed the policy landscape.

During this period, investors played a vital role in propelling economic advancement by escalating ESG issues to boardrooms and engaging Directors, facilitating capital shifts and pricing risks.?

Today Australia has arrived at an uneasy consensus where the focus has shifted to the practical challenges of getting on with the transition to net zero.?

Progress is being made. Renewable energy's share in the National Electricity Market (NEM) surged from 10% in 2010 to approximately 40% in 2024, with a targeted leap to 82% by 2030. The imminent closure of the last coal-fired power station by 2038 underscores this momentum.

Over 40% of Australian households have rooftop solar installed, while the Australian Energy Market Operator (AEMO) in the draft Integrated System Plan (2024) is now predicting that by 2050 Distributed Energy Resources (DER) will dominate dispatchable capacity in Australia’s energy system.

According to the Australian Council of Superannuation Investors (ACSI), more than 80% of ASX200 companies, collectively representing over AU$2 trillion in market capitalisation, have now committed to transitioning to net zero by 2050 or sooner.

But while the economy is clearly transitioning, critical questions linger regarding the appetite and capacity of Australian industries to navigate the scale and pace necessary for genuine climate action.?

Transition tools and frameworks

To deal with these issues, the tools of transition must evolve to clearly articulate and quantify pathways, distinguishing genuine progress from stagnation.?

This means scaled and standardised climate disclosures for companies, enabling a proper interrogation of credibility by investors and?financial institutions.???

On 1 January 2025, mandatory reporting on climate change is set to commence for the first tranche of Australian companies, expanding to encompass over 6000 entities by 2030.

Aligned with the International Sustainability Standards Board (ISSB) framework, the Australian Sustainability Reporting Standards (ASRS) will mandate companies to assess and disclose the financial risks and opportunities associated with climate change to investors, regulators, and the public.

Governed by the Corporations Act and subject to financial auditor endorsement, this regime marks a monumental shift in Australian corporate disclosure practices, already influencing companies' climate response strategies, from a risk and a competitive perspective.??

The Government’s Sustainable Finance Strategy forms the backbone of this transition, proposing a wide range of tools and policies intended to drive capital into the net zero transition.?

Consultations are already underway for a variety of initiatives, including the development of a sustainable investment product labelling regime, enforcement measures against Greenwashing, requirements for the disclosure of corporate transition plans, and support for the sustainable finance taxonomy.

Central to this framework is the development of the Australian Sustainable Finance Taxonomy, overseen by the Councill of Financial Regulators (CFR) Climate Working Group and led by the Australian Sustainable Finance Institute (ASFI).??

Core to the design of the Australian Taxonomy is the explicit use of a transition category. This will be timebound and is intended to bridge the capital shift away from carbon-intensive activities towards a more sustainable economy.

It relies on and builds upon mandated corporate climate disclosure and the publication of Corporate Transition Action Plans (CTAPs).

Proposed criteria for the first three industry sectors (of six) will be released for consultation in May 2024 and include Electricity generation and supply, Minerals, mining and metals; and Construction and the built environment.

Full sector coverage is aligned with the six sectoral decarbonisation plans that the Australian Government is developing to accelerate private sector investment into net zero solutions.?

Challenges

Ultimately, disclosure is a means to an end – a crucial step in driving real-world transition and decarbonisation.

Australian investors are grappling with fundamental issues that define a credible transition. Shareholders are voting their displeasure in record numbers against company transition plans considered inadequate.

Meanwhile, banks are scrutinising client transition strategies as part of their own climate policies, signaling a readiness to divest from entities failing to demonstrate tangible progress. Each wave of engagement sees a new level of detail required.

Mapping targets to Paris-aligned pathways, granular disaggregation of CAPEX allocations to old and new technologies, details on Board level skills that move beyond an annual ESG training session.

Each of these areas are key to a successful transition.? As is finding and scaling new entrants to the market not yet operating, the CleanTech behemoths of future investment portfolios.?

However, real challenges for a meaningful transition remain unresolved.

How do we accelerate the transition away from carbon intensive commodities which underpin the current economy? How can investors and financial institutions accurately assess the credibility and resilience of a company's transition journey?

How do we scale investment into the new industries we are transitioning to? How long can a country, economy, industry sector or company reasonably be allowed to be transitioning before they are simply just uninvestable?

More than climate, moving to a truly sustainable economy

In the quest for sustainable development, the only thing more dangerous that the absence of progress is the illusion of it (EY ).

Transitioning isn't solely about decarbonization to achieve net-zero emissions by 2050, and curbing temperature rise to 1.5°C; it's also about reshaping the economy towards sustainability to address climate, biodiversity, and social justice disparities.

Australia may have had a slow start from a highly carbon-intensive starting point, but change is underway, and the opportunities are real, tangible and investable.

Utilising the tools of transition are both a necessary bridge and a vital reality check on spin over substance.??

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Emma Herd is a Partner, Climate Change and Sustainability Services at Ernst & Young and Co-Lead of the EY Net Zero Centre and Co-Chair of the ASFI Taxonomy Technical Expert Group (ASFI TTEG).?