Finance and investing | FS Sustainability

Investing in net zero "makes business sense"

As published on FS Sustainability

While setting a net zero target and implementing strategies to transition from current carbon emissions activities to that long term goal is not quite business as usual for all companies in Australia, it may be getting there.

With government commitments to bring in mandatory climate disclosure forcing company boards to plan for how to comply with standards, and investors engaging with emissions intensive companies with the aim of working with them to set ambitious reduction targets, companies are under pressure to set aspirational goals backed by realistic short, medium and long-term targets that do not fall afoul of greenwashing accusations.

The challenge is huge - according to Acadian Asset Management, the ASX300 has about a 20% probability of achieving net zero by 2050. Meanwhile, research from investment strategy firm Scientific Beta suggests that super funds need to reduce the carbon intensity of their portfolios at a rate of 7% a year to meet net zero targets, in line with the EU Carbon Transition Benchmark regulatory framework

Q&A with Stephen Catchpole, Finance Sector Lead, Energetics

Q: Why do you say that net zero just makes business sense?

A: Businesses that can adapt and be resilient to climate change, make it a strategic imperative and retool their ability to survive, are the businesses that will be successful.

The companies that will outperform and provide value to investors going forward will be the ones that deliver on their transition strategies.

Q: How do investors establish which companies are optimised for that goal?

A: Investors need to understand which companies are in line with, or have a head start, on their transition pathways. Companies that aren't on the curve have a carbon debt, for want of a better term. They will have to pay for that by accelerating capital expenditure, investing in more efficient technologies, investing in renewable energy procurement which might have net cost.

Investors also need to think about how they model those assets and consider how they factor in a price for carbon. We don't have an explicit carbon price today, but there will be a Carbon Border Adjustment Mechanism, there's the Safeguard Mechanism, and an increased focus on Scope 3 will lead companies to preference suppliers with lower emissions.

Q: How do both companies and investors go about measuring physical risk of climate change?

A: Physical risk is really challenging because it happens on a very localised basis. For example, Flooding is happening one side of the street, but not the other. We know a certain amount is already baked in, but there's a lot of uncertainty about how it will play out.

The main things investors can do is stress test the assets and ask the questions of company management when they're engaging with them - do they understand the physical risk, not just their own operations but their value chain.

Q: Do current reporting guidelines like the Task Force on Climate-related Financial Disclosures (TCFD) and the forthcoming International Sustainability Standards Board (ISSB) accounting standards help investors and companies in analysing and disclosing these risks?

A: TCFD has been a useful but not a perfect contributor. ISSB is really TFCD with teeth. There'll be more consistency across companies in terms of the metrics they're reporting, the considerations they're given, and it's going to force a lot more quantitative analysis into there - as well as a focus on opportunities, not just risk.

Q: How can companies and investors consider investing in adaptation/resilience?

A: One aspect is companies investing in their own resilience and adaptation, and supporting their value chain to do the same. As investors, you need to understand how the investee company is doing that.

The second part is to what extent are we investing in economy-wide resilience, or a city-wide resilience? For example, building a sea wall to mitigate flooding is something no individual company has an incentive to do, but is there a role for government to create an investable asset class to unlock funding for that.