THE Albanese government’s climate bill has cleared parliament, paving the way for a 43% emission reduction target by 2030 – and net zero by 2050.
How will that impact Australian investors?
Investment in electrification and mandated reductions in emissions for big companies will be features of the new plan, says Pendal’s Murray Ackman.
The bill legislates a greenhouse gas emission reduction target of 43 per cent from 2005 levels by 2030 and net zero by 2050, aligned with Australia’s Paris Agreement commitment to helping limit global warming to well below 2°C and ideally to below 1.5°C.
The three biggest sources of emissions in Australia are electricity, industry – which includes gas for industrial processes, domestic heating and the by-products of creating things like cement and fertiliser – and transport.
Electricity is the biggest category, says Ackman, a credit ESG analyst with Pendal’s Income and Fixed Interest team.
“Two thirds of electricity in Australia is generated by burning fossil fuels – mainly coal or gas – and one third is from renewables, mainly wind and solar,” he says.
“Federal Labor policy is to increase the proportion of renewables to 82 per cent.”
This will be done through a $20 billion investment in the electricity grid to increase the amount of renewables and safeguard the load with community batteries that are charged through rooftop solar.
“Removing fossil fuels will require significant spending particularly in utilities and infrastructure,” says Ackman.
“As well as government funding, there will likely be an important role for fixed income investors to provide debt to finance this spend.”
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Ackman says regulators incentivise investment in the grid, which offers opportunity for investors.
“The way the regulator works is you get a mandated amount that you can get in terms of profit from any investments you make.
“This will be significant for fixed income investors because much of the development will be debt funded.
“And it will be significant for equity investors in the big resource companies who will be digging stuff out of the ground to build things.”
Ackman says the $20 billion in loans or equity to rebuild the electricity transmission network involves establishing a new body, the Rewiring the Nation Corporation (RNC), which will be a government-owned entity.
“It’s a bit like the NBN using the blueprint outlined by the Australian Energy Market Operator. The RNC would partner with the transmission companies to modify and rebuild the network.”
Another implication for investors will be in any mandated emissions reductions from the so-called Safeguard Mechanism that requires Australia’s largest greenhouse gas emitters to keep their net emissions below a baseline.
“The Safeguard Mechanism will begin operation in 2023-24 and apply to 215 entities that currently emit more than 100,000 tonnes of CO2 a year,” says Ackman.
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“They will be required to reduce aggregate emissions by 5 million tonnes a year to collectively achieve net-zero emissions by 2050.”
These business include power stations, large foundries and mines and will each have a separate emissions reduction trajectory to be negotiated with the Clean Energy Regulator. They can cut emissions or offset them by buying carbon credits.
Still, it’s important to keep in mind that federal government targets are not the only ones that matter, says Ackman.
Most of Australia’s emissions are from energy, industry and agriculture which is primarily the realm of state policy.
“If you add up the state’s policies, Australia already has an effective 2030 target of 37-42 per cent emissions reductions.
“If State renewable and energy targets for 2030 are met, 55 per cent of Australia’s electricity will be from renewables.”
Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.
Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).
Regnan Credit Impact Trust is a defensive investment strategy that puts capital to work for positive change.
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