Heat rising on companies to take climate seriously

In mid-July, the government announced plans to introduce decarbonisation targets for six sectors, including agriculture and passenger vehicles. This came as Treasury was preparing a framework that will make it mandatory for companies and financial institutions to disclose climate-related risks.

Policies like these will force many companies to adapt their business models and invest in new technology.

This kind of regulatory action is needed if Australia is to have a chance of reaching its stated goal of net zero emissions by 2050. Indeed, more reforms will be needed to get the country on a path consistent with the goals of the Paris Agreement.

Australian businesses and the investors who support them should consider ways to get ahead of future legislation. As the response to climate change reshapes global supply chains, companies without a transition plan today are already at risk of being left behind.

Since coming to power last year, the government has strengthened the 2030 emissions target to a 43 per cent reduction from 2005 levels – compared to 26-28 per cent under the previous government – and increased its ambitions for renewable energy development.

Public support for climate action is strong. According to an Ipsos survey published in mid-July, 59 per cent of Australians support the tougher emission-reduction target, and nearly two-thirds (65 per cent) believe the country should be doing more to combat climate change.

Emissions data also shows that more action is needed to put the country on a net zero trajectory. As of the end of 2022, Australia has reduced emissions by 24.7 per cent from 2005 levels, but the baseline projection from the Department of Climate Change calculates that it will fall well short of the 2030 target without additional measures.

The businesses and investors we speak to on the subject echo this message. Many voice concerns that the country is falling behind other developed markets that have capitalised on climate change, which could damage our competitiveness.

In this context, the decarbonisation plans announced in July for the power, industrials, building, transport, resources and land sectors are a step in the right direction.

Sector-specific transition pathways will provide guidance and clarity to companies that may otherwise be tempted to delay action.

Just as importantly, regulatory clarity gives investors and lenders the confidence they need to help businesses develop and implement transition plans.

Planning ahead

While there is a cost to calculating carbon emissions and monitoring performance against sustainability objectives, a well-thought-out decarbonisation plan can also be good for business.

Globally, companies are increasingly focusing on environmental or social criteria in their supply chains. In places like Germany, local legislation mandates this kind of enhanced due diligence for companies of a certain size. As this trend advances, Australian businesses that can demonstrate they are taking action on emissions stand to gain a competitive advantage.

This is not just theoretical. The European Union will soon impose tariffs on certain carbon-intensive imports – a boost for suppliers with easy access to clean energy. Australian companies also have a chance to profit from healthy diplomatic relations with the US, where government policy is channelling billions into the clean energy sector. The growing US market for battery materials and other clean technology is especially interesting for Australia’s resources sector.

Transition planning and corporate disclosure are already important factors in access to capital. Many financial institutions have set their own net zero targets and are looking for data on how debt or equity investments contribute to that.

Clear reporting and actionable strategies on ESG are key to ensuring companies retain access to capital. Globally, there is ample evidence that banks and institutional investors are willing to support companies with a credible transition plan.

For businesses in carbon-intensive industries, investors will expect to see historical emissions data and forward-looking emissions targets. Then they will consider how the company plans to achieve those targets, and whether its goals are realistic. Investors might also ask what progress the company has already made – or what capital it has invested – towards its transition goals.

Transition risk is also crucial to consider. What risks does a company face as a consequence of a decarbonising economy? Might it be caught out if, for instance, a zero-carbon alternative displaces its main product line? What would tougher legislation on carbon pricing mean for its business model?

Australia may not currently be suffering the kind of extreme temperatures that have made headlines across Europe, Canada and the US, but the impact of climate change is evident. As Australia steps up its policy action, we are encouraged by the response from businesses big and small, with forward-thinking Australian companies looking to embrace the opportunity.