27 September 2023

How risk is playing a role that carbon pricing was designed to play

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Matt Bevan and Jess O’Callaghan* say there is something acting a lot like a carbon price in our economy and it is called risk.

In the business world, chaos is the enemy. For the last decade in Australia, it is something the business community has been fearful of when it comes to climate and energy.

And it is something at least one of Australia’s largest superannuation funds is actively trying to prevent.

HESTA, an industry superannuation fund with assets totalling $67 billion, is trying to reduce its exposure to chaos, according to the fund’s former head of impact, Mary Delahunty.

“We’ve been doing scenario analysis across the portfolio for a number of years,” she said.

The scenario analysis is meant to find out what will happen to that $67 billion portfolio under different potential futures where different actions are taken to combat climate change.

“[We were] looking at what happens to our members’ money in a three-degree [warming] world, or a four-degree world, what happens in a two-degree world?”

The “degrees” she’s talking about is the amount of warming above pre-industrial levels the world will reach before climate action stops the burning of fossil fuels.

At the moment, the nations of the world have agreed to try and limit warming to 1.5 degrees.

“One of the most interesting outcomes of the scenario analysis was that the risk of a disorderly transition, or a sharp policy change, was the greatest risk to our members,” she said.

In other words, the worst possible outcome, economically, is that the Australian government and its counterparts overseas wait too long to implement policies that gradually reduce carbon emissions in time to prevent catastrophic warming.

Then, at a point of crisis, aggressive action is taken to dramatically cut carbon emissions.

Growing pressure

Former federal climate change minister Greg Combet is now chair of the peak body Industry Super Australia and he agrees with Ms Delahunty.

“Every day that passes without concerted action to reduce greenhouse gas emissions in the Australian economy, the ultimate cost adds up.

“The longer you delay, the greater the cost of adjustment.

“And that increases the pressure on future governments to take very strong action to dramatically reduce emissions.”

He said all of Australia’s industry superannuation funds are putting pressure on the companies they invest in to adopt a net zero target by 2050 and set interim targets before then.

But risk is a tricky thing to weigh up, which means it is easier for super funds to tackle some emissions than others.

This year, climate lobby group Market Forces found 14 of the top 40 super players have already divested from thermal coal exposures — or at least they plan to soon.

But when it comes to oil and gas, funds appear to be more hesitant.

Only five of the top 40 funds have either substantially divested from, have some form of exclusion on, or have plans to phase out oil and gas producers.

Ms Delahunty, who spoke to Australia, If You’re Listening while HESTA’s head of impact, has now moved on to found her own consultancy firm specialising in environmental, social and governance standards.

She said the existential nature of climate change means that advocating on behalf of action to limit global warming is in the best interests of all investors.

“Trying to avoid that sort of risk to a portfolio is useless,” she said.

“You realise that you’re dealing with a situation that has no borders and you need to develop a voice on it.

“You actually have to take a government relations position, you have to take a lobbying position, you have to take advocacy on.”

The effort to limit risk in investment portfolios is having an effect on Australian businesses, which are moving ahead of the federal government on climate change action.

Last year, the Business Council of Australia began advocating for net zero emissions by 2050 — months before the Morrison government committed to the target.

Interventions from funds are premature, says the resources industry

The coal industry said there is no need for interventions like these and the market will take care of the issue itself.

Stephen Galilee, CEO of the New South Wales Mineral Council, said the industry was moving in a sensible way.

“There’s no need for any sort of panic or rush on this stuff,” he said.

“Our industry is taking a calm and methodical approach, and those calling for rush and those that are claiming panic are, to a large extent, motivated by a desire to shut the industry down prematurely.

“They want to drive a supply-based disruption to global coal markets, rather than responding to the changes in demand that we’re going to see over an extended period of time.”

Risk is taking the place of a price on carbon

For 20 years, federal politicians debated the merits of a federally regulated market mechanism to put a price on carbon emissions.

An emissions trading scheme, a carbon tax and a carbon price were debated.

None survived.

Ms Delahunty explained “risk” is now playing a role that could have been played by those policies, which has led to investors pushing for decarbonisation of the economy.

“It deeply saddens me that there’s no political space for that kind of conversation at a federal level.

“I think the states have done better than most in that sense.

“There is a genuine role for a federal government to transition this country to something else, for those areas that we know don’t have a future.”

Mr Combet agreed.

“The science is widely respected in the business community and the investor community.

“People are wising up to the risks and they want to know that their money is safe and that really is driving a lot of transformation.”

*Matt Bevan is the host of the ABC Podcast America, If You’re Listening, and the newsreader for RN Breakfast. Jess O’Callaghan is Supervising Producer of On-Demand Audio at ABC News.

This article first appeared at abc.net.au.

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