By Tim King
The Emissions Reduction Challenge
In December 2015, 195 governments agreed to respond to the threat of climate change by “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”(the “Paris Agreement”).
According to the Intergovernmental Panel on Climate Change (IPCC) Special Report on 1.5°C (IPCC SR15), limiting global warming to 1.5°C requires halving human induced CO2 emissions by 2030 from 2010 levels, and reaching net-zero emissions by 2050.
By Tim King
The Emissions Reduction Challenge
In December 2015, 195 governments agreed to respond to the threat of climate change by “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”(the “Paris Agreement”).
According to the Intergovernmental Panel on Climate Change (IPCC) Special Report on 1.5°C (IPCC SR15), limiting global warming to 1.5°C requires halving human induced CO2 emissions by 2030 from 2010 levels, and reaching net-zero emissions by 2050.
Australia is lagging….
Australia’s Greenhouse Gas (GHG) Emissions have risen for the fourth year in a row.
*Year to March 2019 value
Source: Australian Government Department of the Environment and Energy
Furthermore, according to the “Sustainable Development Report 2019”, Australia’s ability to meet both SDG goal 13 (Climate Action) and 7 (Affordable and Clean Energy) are seen as “major challenges”.
Source: Sustainable Development Report 2019
…and Corporate Australia is lagging
Using our proprietary carbon calculator, Melior estimates that the emissions of the ASX 300 are equivalent to approximately 50% of Australia’s emissions. Corporate Australia is therefore critical in driving forward emissions reduction.
However, disclosure of GHG emissions metrics and targets across the ASX 300 is weak and unambitious:
- Only approximately 25% of ASX300 companies have emissions targets. Indeed, the majority of ASX300 companies do not report emissions at all, and many that do report ignore scope 3 emissions1.
- Only 10% of ASX 300 companies are aligned with the Task Force on Climate-related Financial Disclosures (TCFD) principles, a key step in setting Paris aligned emissions reductions targets2.
- Only 7% of companies in the ASX300 have commitments to net zero emissions by 2050. The majority of these companies however do not include scope 3 emissions in their commitments.
- Only 1% of ASX listed companies have set emissions targets consistent with the Science Based Targets (SBT) initiative that models targets to limit global warming to 1.5°C3.
1Scope 1 emissions: direct emissions from owned or controlled sources.
Scope 2 emissions: indirect emissions from the generation of purchased energy.
Scope 3 emissions: all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
2Task Force on Climate-related Financial Disclosures (TCFD) principles: the TCFD is a framework for companies to provide consistent climate-related financial risk disclosures.
3Science Based Targets (SBT): a joint initiative by CDP, the UN Global Compact, the World Resources Institute and WWF that aims to raise corporate ambition. Science Based Targets has translated the scenarios and pathways into a set of resources that companies can use to model 1.5°C aligned targets.
Source: Melior Investment Management
Emerging Overseas Policy Responses
Source: The Inevitable Policy Response Project: A PRI, Vivid Economics and Energy Transition Advisers collaboration, 2019
Why do we care?
Climate change poses both significant potential financial challenges and opportunities.
Companies with no or inappropriate emissions reductions targets may have significant embedded transition risks through a range of factors. Some examples include:
- Regulatory risk: in August 2019 the Australian Securities & Investments Commission (ASIC) released its updates to two Regulatory Guides (RG228 and RG247) to include explicit references to the risks of climate change
- Litigation risk for directors and fiduciaries: climate change risks are increasingly viewed as material and more predictable. As the risks of inaction on climate change increase, litigation risk is also likely to increase.
- Policy risk: As the realities of climate change become increasingly apparent, it is more likely that governments will be forced to act more decisively than they have so far. We are already starting to see policy responses begin to emerge overseas (refer to policy table).
The transition to a low carbon economy also presents opportunities. As Mirvac notes,
“Being a force for good doesn’t need to come at the expense of commercial sustainability. By transitioning our portfolio sooner rather than later, we’ll benefit from energy price certainty and create greater value for our stakeholders. And with low carbon building policy reforms on the horizon, we’ll also be ahead of the curve when it comes to compliance.”
Melior’s Response to the Emissions Reduction Challenge
- We advocate that companies should;
- adopt the TCFD framework, which provides for the disclosure of comparable and consistent information about the risks and opportunities presented by climate change through the four thematics of governance, strategy, risk management, and metrics and targets; and
- Set emissions targets aligned to the Paris agreement.
- We are a low carbon fund and we track our portfolio’s carbon intensity vs ASX300 and have aligned our portfolio with science based carbon reduction targets; and
- We seek to invest in renewable energy companies and companies which are committing to more ambitious GHG reduction targets.
Sources
https://www.unglobalcompact.org/take-action/events/climate-action-summit-2019/business-ambition
https://www.climatecouncil.org.au/leaders-laggards-states-renewable-energy/
http://www.environment.gov.au/system/files/resources/6686d48f-3f9c-448d-a1b7-7e410fe4f376/files/nggi-quarterly-update-mar-2019.pdf
https://sciencebasedtargets.org/
https://www.unglobalcompact.org/docs/publications/Business-Ambition-for-1.5C-Pledge.pdf
https://www.ipcc.ch/sr15/
https://ghgprotocol.org/
https://ec.europa.eu/clima/policies/ets/credits_en
https://www.unenvironment.org/resources/report/emissions-gap-report-2018-key-messages#targetText=The%20key%20messages%20from%20the,the%20Parties%20(COP%2024)
https://www.fsb-tcfd.org/
http://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf
https://www.unpri.org/climate-change/what-is-the-inevitable-policy-response/4787.article
https://www.mirvac.com/About/News/Mirvac-Releases-Its-Plan-to-Reach-Net-Positive-Carbon-By-2030
This content is for general information only. In preparing and publishing this content, Melior Investment Management Pty Ltd (ACN 629 013 896, authorised representative no. 001274055) does not seek to recommend any particular investment decision or investment strategy and has not taken into account the individual objectives, financial situation or needs of any investor. Investors should consider these matters, and whether they need independent professional financial advice, before making any investment decision.