Large foreign investment funds have warned they could blacklist Australia and cut billions of dollars of investments in the country if the federal government fails to join the rest of the world in committing to a net-zero 2050 greenhouse gas emissions target.
The warning backs up concerns of the Reserve Bank of Australia that the economy is at risk from foreign investors withdrawing capital because of perceptions among global fund managers that the Morrison government is resisting strong action on climate change.
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Prime Minister Scott Morrison is under pressure from some Nationals
MPs not to sign on to the net-zero 2050 emissions target on 2005
levels at the United Nations Climate Change Conference in Glasgow in
November. Getty
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Invesco’s UK-based Asian equities director, John Pellegry, told The Australian Financial Review that “among developed markets, Australia’s approach appears to be behind others”.
“This may impact our investments in the future if other parts of the investment universe are tackling the issues more effectively.
“An inadequate climate change policy could lead to the selling of Australian investments – for example if required by our clients or if necessary to adhere to stricter policies outside Australia – for example, EU [European Union] policies.
“A greater valuation discount would also be warranted for the additional risk of investing in companies with less growth prospects and subject to greater externality costs – such as carbon pricing – if behind the curve versus global competitors.
“This could lead us to reduce exposure to certain sectors if the risk outweighs the reward.”
Invesco had $US189billion invested in the Asia Pacific as of March 31, 2021, including in Australian assets.
RBA governor Philip Lowe has said that foreign investors and regulators were very frequently asking “what is Australian business doing to decarbonise?“.
“Many international investors are very focused on this issue,” Dr Lowe said last month. “Increasingly, overseas investors are asking about the carbon content of production and that’s a trend that is only going to continue.”
“It’s a really important issue and it’s going to become more important.“
Following the elevation of Barnaby Joyce to Deputy Prime Minister, Prime Minister Scott Morrison is under pressure from some Nationals MPs not to sign on to the net-zero 2050 emissions target on 2005 levels at the United Nations Climate Change Conference in Glasgow in November.
World leaders including US President Joe Biden and UK Prime Minister Boris Johnson, as well as local companies such as BHP and institutional investors including the $3 trillion superannuation sector, are urging Australia to make the commitment.
Mr Morrison has said his aim is to reach net zero emissions as soon as possible and preferably by 2050, though it is not official government policy and has not been endorsed by the Liberal-National cabinet.
Canadian pension funds, which are big investors in Australian infrastructure assets, said climate change was a strong consideration for their investments.
Canada’s Public Sector Pension Investment Board said climate change was one of several long-term structural trends that will “likely have a material impact on investment risks and returns, across different sectors, geographies and asset classes”.
“With respect to the Australian climate policy landscape, as is the case in all countries in which we invest, PSP Investments closely monitors climate policy regulatory developments,” a spokeswoman said.
”We will continue to evaluate any in-country developments to ensure our portfolio is well-positioned in the long run.
“This entails actively considering climate resilience at the portfolio construction level, factoring climate risks into investment decisions, seeking investment opportunities that contribute to the transition to a low-carbon economy, and encouraging enhanced disclosure on climate change risks by companies in which we invest.”
The Ontario Teachers’ Pension Plan said it was “committed to achieving a net zero greenhouse gas emissions investment portfolio by 2050”.
“Climate change is urgent, complex, and one of the greatest challenges we face as a society and as a business, and it requires partnership between investors and government to overcome this challenge,” a spokesman said.
“For us, making an impact begins with the companies we invest in and we are active, engaged investors committed to supporting the transition to clean energy in the long-term.”
Ontario Teachers’ portfolio includes the Sydney Desalination Plant, which is 100 per cent powered by renewable energy, and it holds a stake in Equis Development Pte which focuses on investing in renewable energy infrastructure in Australia and other Asia Pacific markets.
America’s second-largest public pension fund, the $US307 billion ($408 billion) California State Teachers’ Retirement System, invests in the shares of more than 230 Australian companies.
CalSTRS information officer, Thomas Lawrence, said climate change was the greatest threat to the future.
“We believe change is necessary for companies that do not have a long-term strategy for a responsible transition to a low-carbon economy,” he said.
“We are responsible for the retirement benefits of nearly 1 million members, and have a duty to our members to actively manage long-term risks within the portfolio, which includes climate risk.”
The $NZ58 billion ($54 billion) New Zealand Superannuation Fund said it was working to “significantly reduce the fund’s exposure to both fossil fuel reserves and carbon emissions”.
“Our aim by 2025 is to reduce the emissions intensity of our portfolio by 40 per cent and fossil fuel reserves by 80 per cent,” a spokesman said.
“This is achieved by removing the worst-performing companies from the portfolio and operates at a global level.
“To the extent that national climate change policy supports companies to adapt to climate change whereby they meet the requirements of our Climate Change Investment Strategy, our investment flow will adjust accordingly.”
The New Zealand Superannuation Fund holds about $70 million of Australian federal and state government bonds.
“We are starting to think about how to incorporate climate risk assessments into fixed income assets, but currently do not exclude country or corporate bonds because of their climate change exposure.”
Norway’s $US1 trillion Government Pension Fund Global last year dumped its stake in AGL Energy and put mining giant BHP “under observation”, as part of a strategy to cut its exposure to high greenhouse gas-emitting companies.
AGL and BHP both support a net-zero 2050 emissions target.
Modelling by Australian National University climate economist and former RBA board member Warwick McKibbin found that chronic climate change, extreme climate shocks and global economic policies implemented to reduce carbon could reduce Australia’s economic output by between 0.6 per cent and 1.75 per cent by 2050.
“Countries that rely on fossil fuels in energy generation in domestic production or receive substantial income flows from selling fossil fuel or fossil fuel-intensive products overseas have the most significant negative impacts on GDP,” the March report noted.
Dutch fund manager Robeco Institutional Asset Management BV last month reportedly warned it would soon start pressuring Australia to phase out its reliance on coal and other natural resources, according to an interview with Bloomberg.
Australia had a “particularly high-risk profile” on climate change, said Peter van der Werf, the Dutch firm’s senior manager of engagement and active ownership.
Cutting back on natural resources “are very hard decisions because these are obviously very important sources of revenue for the Australian economy”, Mr Van der Werf told Bloomberg.
“That’s where in those conversations, institutional investors can also provide a perspective how they would foresee such a transition to take place.”
The RBA’s Dr Lowe said last month that changes in the global energy system were opening up new sources of comparative advantage for Australia.
“We will need more investment to capitalise on this advantage, with much of this investment being in regional Australia.”
Links
- Global economic impacts of climate shocks, climate policy and changes in climate risk assessment (pdf)
- Norway's oil fund drops AGL over coal
- Gas demand growth too high for net zero: IEA
- Net zero emissions desirable by 2050: PM
- (AU AFR) Global Bankers Warn Australian Investors On Carbon Risk
- (AU) Climate Action 100+ Investor Group Calls On The World's Biggest Polluters To Lift Their Game
- (AU) Disclosing Climate Change Risk In Bonds A Costly Challenge: RBA
- (AU) Senior Australians Want To Buy ‘Green Bonds’ To Help Address Climate
- Managers Of $40 ($AU55) Trillion Make Plans To Decarbonize The World
- AU) Corporate Climate Risk Disclosures Must Show More: IGCC
- (AU) Investors Are Trying To Shut Down Fossil Fuel Companies From The Inside — This Is What They're Doing
- It’s Been A Landmark Year For Investor Action On Climate Change
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