Where we invest
Market context
Emissions ambition challenged by unprecedented climate, market shocks
Far-reaching global and national developments shaped the emissions landscape in the 2021–22 year, from global and national energy shocks to supply chain challenges, rising interest rates and unprecedented climate events. These factors weighed heavily on an already subdued economy, yet to fully emerge from the pandemic. Despite the negative effects of these macro challenges, 2021–22 carried clear signals about the escalating ambition toward net zero emissions.
Global environment
1.
The COP26 Glasgow Climate Pact committed to a decade of climate action to 2030, including strengthened efforts to build resilience to climate change, curb emissions and provide the necessary finance for both. CEFC CEO Ian Learmonth was part of the Australian delegation.
2.
BloombergNEF reported global investment in the energy transition was a record US$755 billion in 2021. In contrast, the Australian Clean Energy Council reported a significant slowdown in the pipeline for new large-scale renewable energy projects, with financial commitments falling by more than 17 per cent to $3.7 billion.
3.
The Intergovernmental Panel on Climate Change reported inevitable and irreversible human-induced climate changes, with temperatures likely to rise by more than 1.5oC above pre-industrial levels within two decades. Australia faced more frequent extreme fire weather days, heavy rainfall and river floods, coastal erosion, shoreline retreat, sand and dust storms.
4.
In its July 2022 World Economic Outlook, the International Monetary Fund reported increasingly gloomy developments in 2022, with global output contracting as several shocks hit an already weakened post-pandemic world economy. Higher-than-expected inflation worldwide had triggered tighter financial conditions, alongside a worse-than-anticipated slowdown in China and further negative spillovers from the war in Ukraine.
National considerations
1.
The National Greenhouse Accounts showed a 1.5 per cent increase in emissions in the 12 months to 31 March 2022, to 487 million tonnes. Declining electricity emissions due to renewable energy generation was more than offset by increases in transport, manufacturing and agriculture emissions. The figures put national emissions at 21.6 per cent below 2005 levels, meaning half Australia’s midterm emissions reduction task must be achieved in just eight years to meet the targeted 43 per cent below 2005 levels by 2030.
2.
The Rewiring the Nation policy proposes $20 billion of grid-related investment to drive least cost, reliable new energy production, revitalise traditional industries and support new sectors such as hydrogen and battery production. The CEFC is working with the Australian Government on elements of the program.
3.
The Australian Energy Market Operator forecast Australia will need to install more than 10,000 kilometres of new transmission to connect consumers with geographically and technologically diverse, low-cost renewable generation and firming capacity in its 2022 Integrated System Plan. With grid electricity demand expected to nearly double, to 320 TWh by 2050, AEMO is forecasting a nine-fold increase in grid capacity, from 16 GW of large-scale renewables to 44 GW in 2030 and 141 GW by 2050. At the same time, storage capacity would need to increase by a factor of 30, to 61 GW by 2050.
Investor landscape
1.
The value of Australian assets managed using a rigorous, leading approach to responsible investment has hit a record $1.54 trillion, now accounting for 43 per cent of the total market, according to the 2022 Responsible Investment Benchmark Report. A record 45 per cent of investment managers are also holding companies to account on matters relating to environmental and social issues, and reporting back to investors on the outcomes achieved.
2.
The Australian Council of Superannuation Investors reported that 70 per cent of the ASX200 by market capitalisation ($1.59 trillion) was covered by net zero commitments at March 2022. This was across 95 companies, almost double the number the prior year.
3.
Investors and regulators are placing increased emphasis on long-term policy frameworks, with growing levels of scrutiny around the effectiveness of emissions reduction programs as well as the veracity of related claims and achievements. Evolving reporting standards and obligations reflect the increasing market preference for products that appropriately explain their green credentials, a factor in building confidence in emissions-related investment activity.
4.
Investors and large emitters are considering the role of carbon markets in meeting ambitious sustainability goals, potentially offsetting hard-to-abate emissions alongside regenerative farming, soil carbon and sequestration.