With another COP climate change conference behind us, there has been no shortage of criticism.
The final agreement was “watered down” with regards to coal, 2030 targets still aren’t “ambitious” enough and warming is on track to exceed the 1.5 degrees Paris goal.
Albeit complex and impossible to be viewed in isolation, these are all valid concerns.
However, there were plenty of positives to come out of COP26.
That is not intended as a platitude from a naturally optimistic banker.
Getting the world to agree on everything when tackling long-dated issues at short gatherings is always a big ask, and for a global challenge of the scale and complexity of climate change, progress – along with setting pathways that will accelerate progress – is important to recognise given the enormity of what’s ahead.
For one, clearly the cost of decarbonising the world is huge.
Estimates vary, but the Glasgow Financial Alliance for Net Zero noted that around $US100 trillion of finance is needed to reach net zero over the next three decades. As such, the group’s commitment at Glasgow of more than $US130 trillion of private capital from over 450 firms across 45 countries to assist the transition was a strong signal of intent and highlights the critical role business will play.
The move by the international accounting standard body, the IFRS Foundation, to establish the new International Sustainability Standards Board to develop globally consistent climate and sustainability disclosure standards for financial markets was another major win.
Ultimately, acting on climate change falls inordinately on big emitters’ shoulders. But everyone and every organisation and nation have a role to play, and the finance sector is critical to facilitating the investment required.
With greater rigour, consistency and transparency, banks, asset managers and other investors will have more certainty and view the net zero transition for what it is – both a challenge the world must address with haste and an opportunity like few before.
As far back as 1991 when Westpac was a founding member of the United Nations Environment Program, the bank has a long and extensive history of action on climate change and supporting the green energy transition.
In 2002, the bank was involved in the first project financing of a wind farm in Australia, the Challicum Hills Wind Farm.
Fast forward to Friday's announcement by our client Greece-based client Mytilineos of the financial close on the non-recourse financing of the Corowa, Junee, and Wagga Solar Farms in New South Wales, our lending for renewable energy solutions has hit 80 per cent of total electricity generation funding in Australia, up from 45 per cent back in 2011.
To be clear, 13 per cent of our roughly $4.4 billion of electricity generation total committed exposure is gas and just 5 per cent black and brown coal.
This is why Westpac’s transition approach is two-fold. First, we are growing renewable energy investments and second, and equally important, we are committed to supporting our customers in higher emitting sectors with their transition.
We can’t escape the reality that the net zero transition simply can’t happen overnight.
Given our long history of action here, we are targeting at least $15 billion of new lending to climate change solutions by 2030, in addition to significant refinancing and other green and sustainability linked product lending and support. Plus, we recently added climate change as one of Westpac’s strategic priorities in terms of performance.
Whether it’s direct lending, green deposits or facilitating capital markets solutions like green bonds, the opportunities are immense.
Many we know about, such hydrogen and green steel, but there’s also many technologies that will improve and emerge over time, and it was great to see forty nations (including the US, China, India and Australia) agree to the “Breakthrough Agenda”, which seeks to encourage uptake in selected critical technologies required in the global decarbonisation effort.
Critical in all of this for the financial sector is the disclosure and taxonomy issue.
As the IFRS Foundation said, “financial markets need to assess the risks and opportunities facing individual companies which arise from environmental, social and governance issues, as these affect enterprise value”, which is driving “significant demand” for high-quality information that meets global sustainability disclosure standards.
Much has been written and discussed about “greenwashing” risks, which are real. And voluntary reporting and different frameworks has resulted in fragmentation that increases complexity and uncertainty for investors. A global, mandatory requirement – similar to reporting of traditional financial metrics like profit and returns – would simplify and increase certainty for investors and companies.
It was also positive to see the establishment of new rules for global carbon markets to better facilitate the trading of carbon credits.
Stepping back, there has clearly been much progress. Almost 90 per cent of global emissions are now covered by net zero targets, up from 70 per cent pre-Glasgow, and countries agreed to further strengthen 2030 climate targets by the end of 2022.
In addition, Glasgow saw major further breakthroughs between individual nations, notably the US-China Declaration targeting methane emissions despite extended trade tensions between the world’s two biggest economies for a number of years.
Glasgow may not have delivered everything for everyone, and there’s undoubtedly a lot to do before COP27 in Cairo next year.
But the net zero path is getting clearer, and one that our bank is 100 per cent committed to supporting.