Finance key to climate U-turn

Michael Chen
12:00pm May 09 2019

At the Australasian Emissions Reduction Summit in Melbourne today, Westpac head of sustainable finance Michael Chen says a reallocation of global capital is needed to tackle climate change. (Getty)

There is no doubt the global finance sector has ramped up efforts to combat climate change in the past few years following the Paris Agreement.

Since then, the amount of capital that has flowed to green projects around the world has rocketed, the global sustainable debt market quadrupling to almost $250 billion, mostly in green bonds. Meanwhile, assets under management with sustainable investing criteria hit $30 trillion globally in 2018, up 34 per cent in just two years, according to the Global Sustainable Investment Alliance.

This begs a question.

If there is already so much sustainable finance swishing around the world, why are global carbon emissions still going up? Just last year, emissions rose by 1.7 per cent to a record high, according to the International Energy Agency.

The answer, in short, is that it’s still nowhere near enough to decarbonise the economy.

This view is also held by many central banks around the world. Just last month, the governors of the Bank of England and the Banque de France – speaking on behalf of 34 central banks including the Reserve Bank of Australia that form the Network for Greening the Financial System – said “a massive reallocation of capital is required” to meet the challenge.

They rightly added: “We cannot ignore the obvious risks before our eyes.”

In other words, we’re not talking about a slight change of direction. We need a sharp U turn. Despite increased focus on the cost of tackling climate change amid the federal election campaign, the reality is that the later we delay, the sharper the turn and the more disruptive taking action will be to industries, the financial system, the economy and our way of life.

This urgency was a driving force behind a game-changing collaboration announced a few weeks ago between Australian banks, insurers, super funds, investors and industry groups, to form the Australian Sustainable Finance Initiative.

By 2020, the members of this private sector initiative, which also has observers from the Australian Prudential Regulation Authority and the UN Environment Program Finance Initiative, will publish a “roadmap” for the Australian financial sector to systematically make the transition to a more sustainable economy.

This is the first time a whole of finance sector approach in Australia has been taken to lay out a path to collectively mobilise capital, enhance the stability of the financial system and make better financial decisions.

It recognises that the challenges we face are unprecedented, the stakes are undoubtedly high, and we need the commitment and actions from all actors in the financial system. Already, regulators are taking greater interest, the RBA, APRA and ASIC recently making landmark speeches around climate change, and the Australian Sustainable Finance Initiative will help the private sector better work together to ensure our economy succeeds.

It’s early days, but the constructive way the group is working gives me confidence our collective actions will ramp up, and quickly.

For Westpac’s part, its strong record of action in this sphere has notably stepped up in the past couple of years, particularly since the 2017 release of the bank’s latest climate change action plan, which laid out commitments to, among other things, tighter criteria for financing new coal mines and actively reducing the emissions intensity of its power generation lending portfolio.

Now, more than 71 per cent of Westpac’s lending to the power sector goes to renewables – indeed the bank is currently the largest financier of greenfield renewable energy projects in Australia – and we have surpassed our 2020 targets for reducing the portfolio’s emissions intensity.

This week the bank revealed its exposure to climate change solutions – including lending to renewable energy projects, green buildings and low carbon transport – had increased by $1bn in the six months to 31 March 2019, to $10.1bn – surpassing its 2020 target of $10bn.

It’s also been exciting to see overwhelming customer take-up of new types of sustainable financing products like the world-first green tailored deposit launched by the bank in November. It’s clear that appetite among customers for these types of products is growing, and I’m keen to see the response to other structures as they evolve, like sustainability-linked loans – loans that incentivise improvements in borrowers’ sustainability performance by offering a discounted loan margin if ambitious sustainability indicators are met.

In terms of Westpac’s own footprint, the bank also recently announced a plan to source 100 per cent of its electricity from renewable sources by 2025, starting with a power purchase agreement to back the construction of a new solar farm.

While these are all steps in the right direction, they alone will not be enough to help reach the central aims of the Paris Agreement. That’s why the collective work of the whole financial community through the Australian Sustainable Finance Initiative will be critical.

By setting ambitions high, and following through with action, there remains strong hope that we can bend the emissions curve to reach net zero before 2050.
 

Michael Chen

Michael has global responsibility for sustainable finance for Westpac’s corporate, institutional and government clients. This includes both ends of the sustainable finance spectrum: sustainable solutions for clients as well as ESG risk management. Prior to joining the bank in 2015, he held various senior finance and sustainability roles at PwC, IAG and the World Economic Forum and brings a background in project finance. He sits on the Banking Committee of the United Nations Environment Programme Finance Initiative.

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