28 Oct 2021
As decision makers leave Glasgow this week at the completion of the 26th United Nations Climate Change Conference, it’s worth noting the significant achievements towards carbon neutrality and their implications on the global financial system.
More than 100 world leaders promising to reverse deforestation by 2030 is a big positive as is the joint communique between the US and China. While lacking some specific details at this stage, I wouldn't underestimate the power of that agreement and the potential for a resetting of that relationship on economic issues.
“These figures are massive and regardless of how you think it will break down over the next 30 years, the money is already heading there.”
So with a more coordinated framework for the next year in place following the conference, it’s time for the rubber to hit the road on the implementation of these agreements. And to understand how that process will ripple through the financial services industry.
The scale of the opportunity is enormous. According to the International Energy Agency’s World Energy Outlook 2021, investment related to the transition to zero emissions will need to reach $US4 trillion annually by 2030 from around $US1 trillion now.
At ANZ we’ve been working for months to identify the biggest opportunities and how we need to resource our teams to capitalise on the push to decarbonise the economy.
Up until recently banks have approached this mostly as a risk management issue. That has changed and while risk management still plays a significant part, the focus has shifted to the scope of the strategic opportunity.
There are any number of estimates on what needs to be spent to combat climate change out to 2050 - anywhere between US$100 trillion and US$150 trillion. A recent report by McKinsey & Co. estimated that if Australia grasped the decarbonisation transition it would add about A$75 billion to the economy each year through to 2035, as well as adding an additional 130,000 direct jobs over the period.
These figures are massive and regardless of how you think it will break down over the next 30 years, the money is already heading there and we’re already seeing the impact of it in a number of areas.
At ANZ, we see it with investors and their discussions with us about assets we are funding and how they might partner with us to fund such projects. Their scrutiny over our lending practises is also increasing in its intensity and the level of detail they are seeking.
We also see the impact every time we issue a new green bond or a green loan. These offers are often five to 10 times oversubscribed. We’ve seen a well over 50 per cent increase in revenue this year from sustainable finance products.
While it is coming off a smaller base, this growth underlines why our teams need to be ready. We know the appetite and the commitment is there.
Getting it right
It's not an issue of money or demand but a matter of how we get the right projects underway. Getting that right will be important as it could still be a bumpy road as the economy makes the transition. It’s wise to be a little cautious as the sector is still in its infancy.
If you remember back to the market dynamics of solar and wind 15 years ago, there was a big spectrum in the quality of those assets. Some people did extremely well and some didn’t.
Similarly, now a lot of money wants to go into sustainable assets and, as a bank, we must choose what to invest in and how much we allocate.
How quickly does green hydrogen become a reality on a large scale? How quickly do electric vehicles take hold and how do we get the infrastructure in place to facilitate that? Who are the sponsors of the projects and are they of sufficient scale and reputation?
With this in mind we recently undertook a 16-week deep dive into the biggest opportunities, to figure out where to put resources. This helped us prioritise those opportunities and work out where we already have the skills and where we need to build further capability.
In some cases, it may mean partnering with external companies or it may mean buying something. We need to examine how we best put capital into those areas. There may be people offshore who want to get involved in hydrogen or carbon capture and storage – both significant opportunities.
In the Australian context, banks are well capitalised, interest rates remain low and we have a sizeable and sophisticated funds management industry that wants to pursue sustainable outcomes.
To this end we continue working with 100 of our largest emitting customers on their transition plans. Many customers are at different stages but all have welcomed the engagement and others outside this customer group have asked for assistance.
We can already see the way they're shifting and we need to evolve our business to align with those needs. We will be expanding training for our bankers with a program called Mindset 2030 which is designed to help staff better assist our customers. It includes a portal where staff can access a range of information on sustainability and training programs which are done in modules.
We know our bankers understand credit risk, operational risk and reputational risk because they focus on those areas every day. We’re also helping them understand the implications of sustainability and transition across all industries as its importance for our business grows.
It’s up to us all now to capitalise on this transition to a low carbon future and from the momentum created by the COP26 conference.
Mark Whelan is Group Executive, Institutional at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
28 Oct 2021
18 Oct 2021