Why climate action matters for investors: my speech to the Global Race to Zero Summit

Good evening everyone. I am thrilled to be here with you in the lead up to what we hope will be a very impactful COP26.

Climate change is one of the most pressing issues of our time, and if not addressed, it will likely have significant implications for current and future generations.

As a leading global investor, HESTA is focused on managing climate risk across our $64 billion portfolio while also identifying opportunities arising from the transition to a low-carbon future.

We’re seeing an inflection point in responsible investment. Global investors are putting in place strategies to drive down carbon in their portfolios. And they’re looking to capitalise on opportunities arising from the transition to a low-carbon world.?

Global capital markets are rapidly shifting to integrate climate change risks into investment decisions. This will result in trillions of dollars in capital looking for net zero investment opportunities.

Rising to the economic challenge of climate change is going to take an investment mindset from governments and policy makers.

Those countries and companies that set the right targets and strategies to achieve them will be at the front of the investment capital queue.

If Australia does not commit and legislate a net zero by 2050 target with clear interim targets, we risk missing out on this wave of green foreign investment.

The Investor Group on Climate Change, a collaboration of institutional investors representing more than $2 trillion of assets, estimates that if Australia adopted Paris-aligned 2030 goals and committed to net zero it could unlock $131 billion in additional investment and job opportunities over the course of this decade.

Global capital is already sending clear signals that Australia is only just starting to heed.

The world’s biggest asset managers are looking to make net-zero-aligned investment decisions across their vast portfolios. The Net Zero Asset Managers initiative has seen 128 of the world’s biggest asset managers commit to supporting the push to net zero. They’re putting these commitments into action, both through their investment decisions, but also by aligning their powerful data and research capabilities to understand with growing precision where the climate risk lies.

This group collectively represents US$43 trillion in assets under management and includes the largest fund managers in the world.

Capital is clearly going to flow to the countries and the companies with credible and ambitious decarbonisation strategies.

Our more than $3 trillion in Australian superannuation savings and the investment expertise of those who manage it, is an incredible national advantage for Australia that can help power the orderly transition to a low-carbon future.

Already we are seeing Australian asset owners take action.

HESTA was the first major Australian super fund to commit to reducing the absolute carbon emissions across our entire investment portfolio to ‘net zero’ by 2050, with a 33% reduction by 2030.

Others are quickly following. A recent Investor Group on Climate Change survey of Australian and New Zealand members found 40% now have portfolio-wide commitments to net zero and another 40% are planning to implement towards the goal.

So how are investors considering climate change, and what does it mean for Australia’s economy and our companies?

Investors like HESTA are setting climate targets and embedding the implementation of these into all aspects of their investment processes.

At HESTA, our investment decisions are currently based on four dimensions – risk, return, cost and real-world impact.

We’re incorporating an assessment of an investment’s contribution to carbon targets as part of a much bigger piece of work that’s aiming to measure the total impact we’re having right across the investment portfolio.

This work gives us confidence that we’ll meet our climate commitments in a way that is consistent with the best financial interests of our members.

However, we can’t achieve this without systemic change in the real economy and across markets. That’s why if we’re to reach the goals of the Paris Agreement, we must work with other investors to strongly advocate for coordinated global action.

While we can manage our carbon exposures, we remain – as a universal owner – invested across the global economy. So, we’re exposed to the economic fallout that would result from a disorderly transition or the physical risks of climate change.

We believe the costs of inaction are simply much higher than the cost of taking decisive action now. The cost of lagging decarbonisation, and then a sudden, disorderly transition endangers the financial future and quality of life of all Australians.

Governments have a big role to play to enable the large-scale investment needed for a green-led recovery. Already we’re seeing forward-thinking governments around the world putting long-term policies in place to attract green investment.

Currently over half of Australia’s two-way trade is covered by countries with targets to achieve net zero emissions by around mid-century.

This is expected to grow. More countries are likely to commit to net zero emissions targets and other emissions mitigation actions as COP26 nears.

The result of this government action will see a rapid increase in investible opportunities around the globe at a scale required to attract long-term institutional investors.

Governments that have the right policy settings in place will benefit the most, with carbon intensive economies and industries likely to face increasing scrutiny.

This has significant implications for the cost of capital for carbon intensive sectors. And for Australia’s economy whose competitiveness is underpinned by its capacity to attract foreign investment.

The costs of being a global laggard on climate change are likely to grow as the pressure for action increases. Australia will find greater complexity in managing international trade relations if we’re slow to decarbonise.

Managing climate change risks is only part of the picture.

In Australia we’ve been too long fixated on the cost of transition rather than the opportunities.

Investment in renewable and clean electricity production will emerge as the largest investment opportunity overall. Globally, annual clean energy investment must increase by 3.5 times – from $1.2 trillion to $4 trillion to achieve net zero emissions by 2050.

HESTA would have significant appetite to invest more in renewable infrastructure in Australia, if we can overcome existing barriers to investment.

As an early pioneer of investing in renewables and clean technologies, we’ve seen first-hand, the barriers to deploying long-term capital domestically.

Over the past decade the lack of a clear roadmap has made it difficult for investors and companies to set long term transition strategies with confidence.

Current barriers to domestic investment in renewables mean for every $1 we commit to Australian assets we have $3 invested overseas.

Certainty is vital when it comes to committing capital over the very long timeframes required for a renewable energy investment. Our investments locally and abroad are in jurisdictions that offer predictable policy settings and long-term contract tenor.

Now, we know we can’t achieve progress alone. To achieve carbon reduction in our portfolio means we must actively engage with the companies we own.

Just 11 in the ASX300 companies comprise 76% of emissions, and these companies are the focus of our engagement. Seven of these companies have already committed to net zero by 2050 and have set targets to reduce emissions over time.

We’re seeing investors, and business, lead the way. If we’re to cut emissions in time to save us from the worst of climate change, then it’s time government and policy makers catch up.

There will inevitably be hard choices. But for too long we’ve focused on the risks and challenges and not enough on the possibilities. Australia has so much to gain from taking a leadership position in the global push to decarbonise. As investors we see that lowering emissions has the potential to boost business and job creation. It’s now up to us as a country to grasp the opportunity.