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Opinion

Ben Potter

As ESG defies pushback, we should embrace it to define future markets

Australia should identify the four or five export industries it wants to create for the next 40 years, Martijn Wilder says.

Ben PotterSenior writer

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Despite the best efforts of culture warriors and Vladimir Putin, ESG finance and investing aren’t going anywhere but further into the mainstream. Predictions that the chaotic surge in energy costs and scramble by Western economies – especially in Europe – to replace Russian oil and gas would dampen the enthusiasm of corporations and investors to lower their ESG footprints haven’t been fulfilled.

With some exceptions, the opposite has happened.

BP was one exception, declaring it needed to produce more oil and gas to meet demand and that its net zero emissions target would have to be put to one side, to market approval at the time. Still, those gains have since evaporated, and the International Energy Agency reported last week that global renewable capacity additions are set to soar by 107 gigawatts – the largest absolute increase ever – to more than 440 GW in 2023.

“The dynamic expansion is taking place across the world’s major markets. Renewables are at the forefront of Europe’s response to the energy crisis, accelerating their growth there,” the agency says in its Renewable Energy Market Update. New policies are driving big increases in the United States and India over the next two years, and China is consolidating its leading position to account for almost 55 per cent of global additions of renewable power capacity.

Martijn Wilder, CEO of Pollination, says embracing EGG concepts should lead Australia to identify export industries for the next 40 years: “You don’t just mine it – you define it.”  

Martijn Wilder, CEO of Pollination, a green investment bank, says these policy actions reflect the fact that climate change is the No. 1 issue facing governments and businesses, a fact reinforced by the presence of the US, UK and German ambassadors at a Parliamentary Friends of Climate Action event in Canberra on Thursday. Germany and the UK want Australian green hydrogen and critical minerals, the UK wants to reduce its 90 per cent dependency on processed lithium from China, where 90 per cent of Australia’s raw lithium is processed, and the US wants Australian miners inside the Inflation Reduction Act tent to help overcome obstacles to energy and national security.

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“There’s a whole agenda sort of developing around green growth, economic growth,” Wilder says. “In America, there’s no doubt there’s been a pushback on ESG at some level. At another level, it remains still absolutely fundamental to the long-term growth of the economy.” Some Coalition politicians trolled Westpac and other financiers that declined to fund Adani’s controversial Carmichael coal mine, but this had little impact. “At the end of the day, directors have a duty to consider climate risk, and they have a duty not to invest in stranded assets,” Wilder says.

Return to growth

Putin’s Ukraine war and chaotic markets body-checked the rise of ESG finance last year after 2021’s bull market in all things investment had taken it exponential. Rules on what can be considered a green bond are also getting stricter to combat “greenwashing”, says Wilder.

Even so, the first quarter of this year saw a return to growth in Australia, with $US11.9 billion ($18.3 billion) of issuance across sustainability, social and green bonds and loans, up from $US8.4 billion in the last quarter of 2022 – but below 2022’s record first quarter of $US16.4 billion – according to Westpac’s quarterly sustainable finance update. Global issuance of $US338.4 billion was down just 1 per cent on the last quarter of 2022 (and 14 per cent on 2022’s first quarter).

Green bonds and loans accounted for two-thirds of ESG issuance in Australia. ESG credit is still only a fraction of total debt issuance, accounting for about 4 per cent of total non-government debt issuance in 2022, according to data from Coolabah Capital and Bloomberg. But this is up from just 0.9 per cent in 2018, and just 0.2 per cent in 2014.

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Premiums for ESG bonds (or “greeniums”) over conventional bonds are still measured in the low single digits – one to three basis points – for Australian state government bonds and about five basis points for big Australian banks, Coolabah’s chief investment officer Christopher Joye reported last month, although these premiums fluctuate and were higher during last year’s market turmoil.

Financial regulators are scrutinising claims to green credentials more closely. The Australian Securities and Investments Commission has issued its first “greenwashing” court action against Mercer Superannuation for making false and misleading statements about the sustainability of some super fund options and has other funds in its sights. So-called “green hushing” – suppressing climate and ESG disclosures to avoid liability for misstatements – won’t work long term because such disclosures will soon be mandated.

Wilder says such actions are among of a range of factors intensifying pressure on boards and investors to walk the walk on ESG. Reforms to carbon offsets to make them more rigorous recommended are another, although this is unlikely to end the debate over their effectiveness.

The federal nature repair bill – which many companies are only just coming to grips with – will give rise to a whole new batch of integrity issues. You can’t just chop down a beautiful woodland area and then expect a bit of grassland somewhere to be accepted as a like-for-like exchange. Developers should instead buy or create more offsets than are needed and be “nature positive”, Wilders says.

Embracing ESG concepts should lead Australia to identify the four or five export industries it wants to create for the next 40 years – say, green hydrogen, renewable energy, critical minerals, recycling – and back them hard, he says.

“You don’t just mine it – you define it.”

The Australian Financial Review ESG Summit takes place on Monday, June 5 in Sydney.

Ben Potter writes on energy, climate change and innovation, and has been Washington correspondent, opinion editor and companies editor. Connect with Ben on Twitter. Email Ben at bpotter@afr.com

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