21 June 2022

Capital critical on the path to lower emissions

The efficient allocation of capital is as critical to the success of the Labor government’s newly announced climate ambitions as the policy settings it chooses to adopt.

The Government’s commitment to cut Australia’s emissions by 43% by 2030 is certainly welcome news, but the reality is that this decision will need to be implemented in parallel with sufficient private funding for Australia to meet its net zero ambitions.

Bear in mind that an estimated USD2.6 trillion in global investment is needed every year to 2025 to put the world on a path to net zero by 20501 and much of that vast amount needs to either be directly provided by the banking sector or obtained via transactions that are facilitated by it.

Sustainable finance – one of the chief mechanisms for achieving climate targets – has evolved quickly since the first green bond was issued by the European Investment Bank in 20072. A record high of more than USD1.4 trillion of sustainable debt was issued globally in 2021, according to the Institute of International Finance3, via vehicles ranging from green loans to green municipal bonds, social bonds and sustainability linked loans.

Australia’s share of sustainable finance since its inception has already funded projects including electrified light rail systems4, low carbon property, solar farms and waste management initiatives5. Increasingly, it is being used to hold local companies accountable for reducing carbon emissions or water usage, as well as for meeting targets that fall within the ‘S’ of the ESG equation, such as gender diversity and labour rights.

Green foreign direct investment is also on the rise as Europe, in particular, capitalises on opportunities arising from Australia’s build out of its renewable energy infrastructure and low emissions technology, including the nation’s largest solar farm in southern Queensland.6

But a number of urgent steps are required for the steady flow of capital to sustainability initiatives to become the flood necessary to match Australia’s accelerated climate ambitions under the Labor government.

Firstly, more companies must accept the challenge of incorporating all three elements of ESG into robust transition plans that demonstrate the resilience and longevity of their operations to creditors and investors. Reluctance to do so will over time restrict access to capital at market rates as banks like HSBC align their financed emissions – the greenhouse gases of their clients – to net zero by 2050 or sooner.

Indeed, investing in sustainable outcomes is now akin to investing in the resilience and longevity of a company. Treasury and finance teams must work in partnership with others across their business and supply chains to constructively challenge operations and imbed sustainability into everyday practices.

Secondly, the local financial sector must focus on developing taxonomies and other frameworks that will inspire confidence that investments and assets purported to be sustainable, do actually pass not just the pub test but also meet formal standards. Global banks have been actively involved in multiple sustainable finance taxonomies’ initiatives, and have much to offer as Australia continues to develop its own frameworks and taxonomy to support the net zero transition and sustainability more broadly, for the benefit of all stakeholders.

Thirdly, the private sector must use its financial heft to support the early stage development of new climate solutions which could trigger the shifts in behaviour required to meet sustainability goals. For example, Australia has the scientific, conservation, governance and financial expertise to develop nature-based solutions that could contribute significantly to decarbonisation and also offer protection from the physical impacts of climate change.7

The rewiring of the financial system to meet climate goals is a long-term play with much at stake for all stakeholders to get it right. There is an obvious commercial imperative for banks, both to capitalise on a once-in-a-generation business opportunity and, equally importantly, to meet the increasing demands of regulators who are closely monitoring the resilience of industry balance sheets to climate change.

But the banking industry is also facing the reality that it must adapt its own operations in parallel with its customers as part of the biggest and fastest industrial transformation the world has seen. Now is a crucial time for all stakeholders to work collaboratively to unlock and allocate the capital that will firmly set Australia on a one-way path to net zero and ensure an equitable transition for all.

This article by HSBC’s Head of Sustainable Finance for Australia, Amanda Taylor, first appeared in The Australian on 20 June 2022.