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Australia: Uniquely placed for transition investment

By November 23, 2023November 27th, 2023No Comments
By Abi High and Nicola Macgregor

At COP28, commencing 30th November 2023, the importance of financial flows to climate solutions will once again be an important topic. A long-term goal of the Paris Agreement1 is to ensure that finance flows – both public and private – are consistent with low-carbon, climate-resilient development. Many developed economies are stimulating financial flows to transition and adaptation investments, e.g., Inflation Reduction Act in the US. We believe Australia has an important role to play.

Australia is in a unique position as the world strives to respond to climate and nature challenges. In particular, Australia’s combination of vast natural resources (mineral, renewable and natural capital related), advanced and globally integrated financial markets and strengthening climate policy and regulation creates numerous climate-related investment opportunities.

On November 3rd 2023 the Federal Treasury released Australia’s ‘Sustainable Finance Strategy’2. This strategy confirms that the Australian government is focused on ‘Positioning Australia as a global sustainability leader’.

“Australia’s strong and stable financial system, respected regulators, sophisticated investors and significant
sustainability-related capabilities and opportunities mean we have a lot to offer.”
Sustainable Finance Strategy Consultation Paper, November 2023

This will present both attractive investment opportunities and important ESG considerations for Melior.

Investment Opportunity: Critical Minerals

As we discussed in our previous thought piece3, a low carbon future is predicated on the extraction of critical materials. Australia’s geology alone requires that we play a key role in the energy transition. Demand for critical minerals materials such as lithium, copper, nickel, cobalt and graphite – key ingredients in solar, wind, electricity networks, electric vehicles (EV) and utility battery storage components – is primed to increase rapidly.

Minerals used in clean energy technologies compared to other power generation sources

Source: IEA, The Role of Critical Minerals in the Clean Energy Transition

Australia has a stable political environment, a strong mining industry, and a well-established regulatory framework, making it a reliable source of critical minerals. Australia’s reserves are in the top five for 21 key world economic resources including cobalt, lithium, and vanadium4.

Australia is also the world’s:

  • Largest lithium exporter, and was responsible for 53% of global production in 20225
  • Second largest cobalt producer, with around 19% of world cobalt resources6

The Australian government and industry stakeholders are actively working to capitalise on this opportunity and position the country as a key player in the critical minerals market. In 2023 the Federal Government has released:

  • The Critical Minerals Strategy7 which will support the development of Australia’s upstream critical minerals mining and processing sector. The strategy calls out the ability of Australia’s critical mineral industry to create jobs and national wealth, therefore attracting investment is identified as one of the strategy’s six key focus areas.
  • A draft of the National Battery Strategy8, which is currently incorporating consultation feedback. Complementing the Critical Minerals Strategy, this focuses on the downstream manufacturing and assembly components, capitalising on Australia’s existing advantages and highlighting the role of Australia’s mining sector in the lithium-ion battery global value chain.

The global lithium-ion battery value chain segments and market shares

Source: Accenture, Future Charge: Building Australia’s Battery Industries.

These strategies sit alongside the Federal Government’s $15bn National Reconstruction Fund, established as the primary vehicle to reboot domestic manufacturing and maintain capital investment in Australia to support growth of the clean energy industry.

ESG Opportunity: Electrification

Melior actively advocate for companies to measure their carbon footprint and set emission reduction targets. For many companies, Scope 2 emissions (i.e. emissions from the purchase of electricity) are a large proportion of the overall footprint. Sourcing renewable energy, either directly or via PPAs (Purchase Power Agreements) or similar, is a common way for Australian companies to reduce their Scope 2 emissions.

The Australian continent has the highest solar radiation per square metre of any continent, and consequently some of the best solar energy resource in the world9. Australia has set a goal of generating 82% of its electricity through renewable sources such as solar and wind by 2030, and solar energy is expected to be a significant contributor to achieving this target.

Australia’s residential solar capacity has grown exponentially since 2016 as a result of high residential adoption and increasing regulatory backing. It is estimated that rooftop solar accounted for more than 25% of Australia’s renewable energy generation in 202210.

Annual capacity of residential solar installed in Aus (MW p.a)

Source: SunWiz, The 2023 Annual SunWiz Australian PV Report 

The Australian solar power market is expected to grow at ~14% (2023-2028), from current market volume of 36.5 gigawatts to 70.46 gigawatts by 202811. This growth is being fuelled by several drivers, most notably high electricity prices, regulatory incentives and changes (such as recent changes to the National Construction Code) favouring widespread adoption of solar installation during construction.

The increasing availability of solar energy across Australia is also driving broader adoption of on-site batteries. These batteries enable the storage of excess power generated during the day, even when it may not be economically viable to sell it to others. This also empowers the creation of networks of batteries, effectively forming virtual power plants. This network can be coordinated to release stored power back into the grid during peak demand in an organised manner at the end of the day. This trend is creating evermore opportunities for companies to replace traditional electricity sources with renewable energy – driving emissions intensity down and often creating economic value for shareholders (given the declining cost of renewable generation).

ESG Opportunity: Natural Capital

Nature is fast-emerging as the next frontier within climate change12. We actively advocate for companies to stay abreast of the rapidly-emerging reporting frameworks and policies for nature risk. Australian-based companies have a particularly important role to play in preserving natural capital given that Australia is one of the world’s ‘megadiverse’ countries.  Megadiverse countries only make up 10% of the world’s surface, but they support more than 70% of all species13.

More than 50% of the global gross GDP, ~$44 trillion of economic value14, exhibits moderate to high dependence on nature. This significant interconnection between economic activities and nature has gained international attention – this can be seen in the rapid development of the Taskforce on Nature Related Financial Disclosures (released in September 2023) and the International Sustainability Standards Board indicating that it will develop a nature-focussed disclosure standard. Safeguarding nature is fundamental to climate resilient development. The loss of nature is therefore inextricably linked to the challenges of climate change as well as land and ocean degradation, therefore a transition to net zero requires the preservation and restoration of natural capital.

In March 2023, the Australian Federal Government launched the Nature Repair Bill which provides a framework for the generation of tradeable ‘biodiversity certificates’, which would enable investment in approved projects which enhance or protect biodiversity in native species. This will further expand opportunities to invest in natural capital credits.

At Melior, we continue to look for investment opportunities in the energy transition space. Producers of critical energy materials contribute to SDG sub goal 7.2: “Increase substantially the share of renewable energy in the global energy mix”, and Melior believes that it is crucial to both direct capital to these companies as well as advocate for continuous improvement in mining practices such that companies minimise their environmental footprints, invest in community projects and programs, respect cultural heritage and diversity and create economic opportunities.

IGO (held) is an example of a company that will benefit from the transition to clean energy. It has repositioned itself as the only company globally which can supply four key electric vehicle (EV) battery materials; copper, nickel, cobalt and lithium. IGO has a strong focus on responsible production and integrates “proactively green thinking” and a sustainability framework into all aspects of its value chain.

We are also advocating to companies to improve their Environmental credentials, by embracing new technologies such as renewable energy generation and staying at the forefront of regulatory developments, such as the Taskforce for Nature Related Financial Disclosures (TNFD). Melior has been actively involved in the pilot phase of the TNFD beta framework, through co-chairing RIAAs (Responsible Investment Association Australasia) Nature Risk and Exposures Working Group. Pilot testing the TNFD Beta framework represents a valuable opportunity for companies to explore the implications of the TNFD’s approach, and prepare for the imminent market adoption of the TNFD framework.

Sources

1 The Paris Agreement’s central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
2 Sustainable Finance Strategy Consultation Paper, November 2023
3  COP26 heightens the urgent role of critical minerals in the clean energy transition – Melior Investment Management (meliorim.com.au)
4 Australian Trade and Investment Commission, Critical Minerals
5 Office of the Chief Economist, Resources and Energy Quarterly March 2023
6 Office of the Chief Economist, Outlook for Selected Critical Minerals 2021
7 Critical Minerals Strategy 2023–2030
8 National Battery Strategy Issues Paper
9 Geoscience Australia, Solar Energy
10 Clean Energy Council, Large-Scale Solar
11 Mordor Intelligence, Solar Energy in Australia Market Size & Share Analysis – Growth Trends & Forecasts (2023-2028)
12 Solving for Nature Loss: The Next Frontier in Climate Action – Melior Investment Management (meliorim.com.au)
13 Australian Conservation Foundation, Australia is a megadiverse country – what does megadiverse actually mean?
14 World Economic Forum, Half of World’s GDP Moderately or Highly Dependent on Nature

This Report is issued by The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL No. 235150) as Responsible Entity and issuer of units in the Melior Australian Impact Fund, based on information prepared and collated by Melior Investment Management Pty Limited (Melior). Melior is a Corporate Authorised Representative (No. 001274055) of Adamantem Capital Pty Limited (ACN 614 857 037, AFSL No. 492717). It is general information only and is not intended to provide you with financial advice, and has been prepared without taking into account your objectives, financial situation or needs. You should consider the product disclosure statement (PDS), prior to making any investment decisions. The PDS and target market determination (TMD) can be obtained by calling +61 2 9004 6071 or visiting our website www. meliorim.com.au. If you require financial advice that takes into account your personal objectives, financial situation or needs, you should consult your licensed or authorised financial adviser. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Total returns shown for the Fund have been calculated using exit prices after taking into account all ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance. Listed equities markets can experience volatility, particularly in the short term. Investments in listed equities markets are therefore generally classified as higher risk than other asset classes such as fixed income and cash. As the Fund invests most of its assets in Australian listed equities, it should be considered a high risk investment. Please refer to the PDS for details of the types of risks which are associated with investing in the Fund.