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Insights and News /

28 October 2021 3 min read

As Australia commits to net zero, financial services can be a force for positive change

Andrew White

Andrew White
Director | Financial Services | Sydney

Ben Nethersole

Ben Nethersole
Senior Manager | Energy, utilities and resources | Melbourne

On Tuesday, the Australian Federal Government announced its long awaited commitment to achieving net zero, ahead of Prime Minister Scott Morrison’s attendance at COP26.

Though there remain key gaps in the plan to get to net zero, such as the suite of policies needed to achieve these ambitions, the announcement is reflective of the significant efforts to date by Australian consumers and businesses to decarbonise.

These efforts would not have been possible without the financial support from Australia’s financial services industry and state government actions. More and more of Australia’s banks, insurers and investment managers are, or are considering, signing up to the United Nations Environmental Programme Finance Initiative (UNEP FI), be they the Principles of Responsible Banking (PRB), Principles of Responsible Investment (PRI), or Principles of Sustainable Insurance (PSI). These initiatives provide a proactive framework under which to do business responsibly and speak to the various channels through which financial institutions impact emissions (i.e., borrowing and lending, investment, and insurance provision).

But Australia’s commitment to achieving net zero will mark a step change, one that creates challenges and opportunities for the country’s financial services sector - not least to be a force for driving positive change in Australia and indeed the world. But beyond this, there are significant commercial returns to be realised. The transition creates opportunities to support heavy polluting sectors in their efforts to decarbonise and to fund green industries, resulting in increased profitability and growth for financial services firms.

What questions should Australian financial services firms embarking on this journey be asking in the wake of this announcement?  

What emissions do we finance?

The first step that firms should take is to measure and establish a baseline. Assessing financed emissions requires detailed data from internal and external sources. Furthermore, a consistent methodology must be applied to define the baseline. The Partnership for Carbon Financials (PCAF) is a commonly used standard adopted by the financial sector. This is a complex process but a critical one to start to understand your baseline emissions.

What does the future hold for your baselined portfolio?

Scenario analysis is a key tool to understand how your portfolio will need to change if global temperature rises are limited to 1.5°C. The International Energy Agency’s ‘net zero by 2050’ scenario authoritative is a benchmark with which to carry out scenario-based analysis.

What change is required at the individual counterparty level?

It’s important to remember that there is no one-size-fits-all solution here. Each company will have their unique transition path to net zero, driven by their business model, sector, region and climate commitment. Firms need to get to know each counterparty’s processes and technologies inside out, to understand what is viable. By engaging with clients in this way, banks can offer the appropriate support and incentives to meet net zero targets and commitments. But we must look beyond the current emissions of clients. For instance, there are some companies with high levels of CO2 emissions that have a clear transition strategy which will require financing. Other companies, meanwhile, may have stronger starting positions, but no clear plan to move to net zero.

Navigating the transition to net zero

The time for action is now. Baringa can support you to realise these opportunities and minimise your risk. We’ll help you to understand what the transition to net zero means for your assets, liabilities, business operations, and staff and support you to take the right steps.

We’re trusted by leading financial services firms to support them in this journey thanks to our 21 year heritage in the energy industry and a best-in-class climate risk model that provides an integrated assessment of physical and transition risk.

Email Andrew White to discuss how your financial institution can develop and meet its emissions commitments or Ben Nethersole for support in developing and implementing a decarbonisation roadmap for your business.