28 October 2021
Finance is playing a significant role in encouraging Australia’s push towards net zero, with companies that commit to climate targets finding it easier to attract investment and raise capital, according to Jo Spillane, Global Head of Private Capital Markets at Macquarie Capital.
“Investors are looking to deploy their capital into companies and assets that have charted a clear path towards sustainability,” Spillane says. “At the same time, they are actively withdrawing capital from those companies seen as laggards.”
Spillane says that one of the main vehicles through which this is happening is Australia’s pension funds, or superannuation (super) funds as they are known locally.
Under Australia’s compulsory superannuation legislation, employers must contribute 10 per cent of every employee’s salary directly into super to help provide for their retirement and ease pressure on government welfare payments. This system has helped create the world’s fifth-largest pool of pension capital, worth around $A3.3 trillion ($US2.46 trillion).1 This is made more impressive by the fact that Australia is only the world’s 55th largest country with a population of less than 26 million.2
In fact, Australia’s super funds have so much capital that by 2019 they owned almost 40 per cent of the shares listed on the entire Australian Stock Exchange (ASX). This is likely to rise to around 50 per cent by 2030.3
“Increasingly, these members expect their retirement savings to be invested in assets that align with their values,” Spillane explains. “This is creating real ‘bottom-up’ pressure on fund managers to invest their members’ retirement money in a sustainable way. That is, in companies that make ESG (environmental, social and governance) considerations, including decarbonisation targets, their priority.”
As a result, some of Australia’s largest super funds have announced they would potentially use their voting rights to oust company directors who do not commit their businesses to properly addressing their contribution to issues such as climate change.4
However, Spillane says for many private equity investors, investing in businesses that have committed to decarbonisation is not simply a values-based decision. There is also an element of risk management involved, with those companies that have committed to sustainability generally seen as safer assets.
“There is a general acceptance now that companies with a high emphasis on ESG, including those taking active steps to adapt to climate change and its effects, are also more likely to be better long-term performers and more resilient in the face of likely changes,” Spillane says.
“Investors will expect higher returns before putting capital into those that don’t have the same outlook.”
This is a view that seems to be shared by the Australian Prudential Regulatory Authority (APRA), regulator of the country’s financial sector. In April 2021, it issued guidance calling on boards of super funds, banks and insurers to properly identify and mitigate climate risk.5
Those companies that have committed to decarbonisation are generally seen as lower risk and are therefore able to get access to cheaper finance.”
Head of Debt Capital Markets
Macquarie Capital, ANZ
Many financial institutions had already been factoring climate change into their lending policies, including setting lending targets for green loans, says Iain Melhuish, Macquarie Capital’s Head of Debt Capital Markets, Australia and New Zealand.
“This has been driven by so many factors including shareholder and stakeholder demands, but also by financial markets themselves, including fund managers and bond investors. We’re even seeing ratings agencies include ESG concerns, such as environmental impact and climate change risk, in how they assess the riskiness of borrowers.”
“Those companies that have committed to decarbonisation are generally seen as lower risk and are therefore able to get access to cheaper finance.”
This, he says, was what underpinned Macquarie’s Green Investment Group’s ability to arrange finance for the Murra Warra II wind farm project in Horsham, Victoria. The project, which will provide 290 MW of green energy when completed, received financing through a consortium of international banks including ICBC, ING, Mizuho, MUFG, SMBC and Société Générale and was the first time a green loan was used to fund a wind farm in Australia.
“It would be remiss of any company director not to try to lower the cost of their capital,” Melhuish says. “But at the same time, qualifying for a green loan is about more than keeping down costs. It’s a signal to the broader community and economy that you’re future-looking and an active part of the broader energy transition.”
Georgina Lalor, Co-Head of Equity Capital Markets Australia and New Zealand, notes that what’s happening in Australia is part of a global trend.
However, while Australia may have been slower to adopt the same standards, the sheer pace of change now happening in corporate Australia has caught some by surprise.
“Last reporting season was something of a catalyst,” Lalor explains. “54 corporates in the ASX 100 came out with stated net zero targets. In 2019, we had just 12 companies committing.”
“So far, it has often led by those companies operating in high emitting industries that have made sustainability commitments. However, we believe it is only a matter of time before almost all ASX 200 commit to net zero.”
Lalor says that directors who fail to commit to emissions reduction targets will begin to see their company’s value impacted, with investors assessing both their commitment to climate targets as well as on the practical steps they have implemented to date.
“Our own analysis suggests that 40 per cent of funds under management on the ASX are now invested through an ESG lens,” she says.
The last year has confirmed a change in thinking from investors, lenders, shareholders and stakeholders when it comes to climate change. Most now view a commitment to tackling climate change as something that is likely to make a company more profitable, rather than less.
“These are the companies of the future,” Spillane says. “There is no longer a sense in the investment community of any tradeoff between investment returns and ESG.”
“ESG is now fundamental for any company looking to attract investment. This includes having a commitment to climate goals.”
“Those companies that don’t take notice and don’t get it right could ultimately risk losing billions of dollars of market capital.”