Driving the climate transition revolution: The path to a sustainable economy
As the world stands at a crucial crossroads in its efforts to combat climate change, recent discussions among industry leaders emphasise the importance of strategic investments and partnerships in fostering a sustainable future. The urgency of transforming our economy to achieve net-zero emissions cannot be overstated, and the path forward is filled with opportunities that can drive growth, innovation, and job creation.
On the 19 September at the Responsible Investment Association Australasia (RIAA)’s conference in Aotearoa New Zealand, Co-CEO Estelle Parker moderated an incredible panel including the Hon. Dr Megan Woods (Labour Spokesperson for Climate Change, Energy, Resources and Associate Finance – MP for Wigram), Sarah Minhinnick (CEO of New Zealand Green Investment Finance) and Alastair Rhodes (CEO of BayTrust ) who unpacked sustainable investments and transitioning from risk to opportunity.
Government support for sustainable investments
One of the standout themes from the discussion is the need for a comprehensive approach to decarbonisation. It’s evident that simply relying on market forces will not suffice; government intervention is essential to establish a regulatory framework that encourages green investments. This element will be key if we are to unlock the potential for sustainable projects, from renewable energy to energy-efficient infrastructure. Investing in renewable energy sources, particularly solar and wind, can create hundreds of thousands of jobs while significantly reducing our carbon footprint.
Policy uncertainty has been highlighted as a barrier to climate investment, both in Aotearoa New Zealand and in Australia and addressing this is paramount. Government has a pivotal role in this transition, to implement policies that not only support the growth of green initiatives but also incentivise the investment sector to invest in these initiatives.
In some cases, the best government action is to “get out of the way of the investment community” to allow for these investments to happen. Indeed, in a later presentation at the event, Hon. Simon Watts, New Zealand Minister of Climate Change and Minister of Revenue told the audience exactly that.
Clear emissions reduction targets and a consistent regulatory environment will provide the stability investors need to commit to long-term projects. We know this to be true if we take a look at the global green economy and its growth.
Global green economy makes strong recovery in 2023
The global green economy, a market providing climate and environmental solutions, has expanded considerably over the last decade. Following a notable decline in 2022, it made a strong recovery in 2023, with market capitalisation reaching US$7.2 trillion in Q1 2024*.
Headwinds remain, such as overcapacity issues and trade barriers related to renewable energy equipment and electric vehicle (EV) manufacturing. And, following downsizing at some large US green companies earlier this year, the share of the green economy in the market dropped slightly from 8.9% at the end of 2023 to 8.6% in Q1 2024*.
But, despite market volatility and increasingly complex geopolitical risks, the green economy is expanding, and its long-term growth (10-year CAGR of 13.8%*) outpaces the broader listed equities market.
Partnership matters in climate transition
It cannot be underestimated the importance of building strong partnerships among all stakeholders. Collaborative efforts between government, asset owners, asset managers and industry can create a more resilient economic framework that supports sustainable development. “It’s about working together to create solutions that benefit everyone,” Minhinnick reiterated, highlighting the need for shared responsibility.
Highlighting one such global partnership is the Transition Pathways Initiative or TPI for short. Established and led by a group of asset owners and asset managers, TPI is hosted by the London School of Economics and the Grantham Research Institute, with FTSE Russell as the data partner. TPI empowers investors to assess the alignment of their portfolios with the goals of the Paris Agreement and drives real world emission reductions through our actions. At last count, there is over 150 supporters globally representing over US$80 trillion in assets under management. And we are already seeing many of these supporters realising the opportunity that is born from climate risk.
One such investor is the California Public Employees’ Retirement System (CalPERS) who in July this year committed almost US$10 billion in new actions aimed at investing in the global transition to a low-carbon economy, including new private market investments and a customised public equity index to enhance the pension fund’s climate-aware investing.
According to CalPERS Chief Executive Officer Marcie Frost, the approach is “Designed to take advantage of the rapid growth in climate transition investment opportunities, the kind of high-quality investments that are essential in paying the retirement benefits promised to our members and their families. As we continue to measure the portfolio risks posed by climate change, our long-term strategy must also include providing some of the capital needed to finance the decarbonisation of the global economy.”
New Zealand and Australia: Potential leaders in sustainability
The urgency for action is clear; we cannot afford to delay our transition to a low-carbon economy. The impacts of climate change are already being felt, and inaction will lead to dire consequences for future generations. Thus, collaboration across sectors is essential. Engaging with various stakeholders, from government entities to asset owners, asset managers, investors and community groups, will foster a unified approach to tackling climate challenges.
As we look ahead, it’s crucial to maintain our ambition and courage in pursuing these goals. New Zealand and Australia have the potential to become global leaders in sustainability, showcasing how economic growth and environmental stewardship can go hand in hand. By seizing the opportunities presented by the green revolution, we can ensure a prosperous, sustainable future for all.
*Figures from the LSEG Annual Green Economy Report.
David Ho, Head of Pacific, Index Investments Group, FTSE Russell
David is currently the Head of FTSE Russell’s Index Investments Group for Australia and New Zealand and primarily looks to catalyse asset management flows into sustainable finance options through indices. David sits on the APAC leadership team and has a deep understanding of the asset management industry having held critical and senior roles throughout the asset management value chain.
With close to 20 years of experience working in the Financial Services sector. David has previously worked with ETF issuers tasked with establishing the business onshore ensuring regulatory compliance and prior to that David worked with the Australian Securities Exchange (ASX) managing the cash equity trading platform as well as building out ASX’ Investment Products business.
Disclaimer: The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA). This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions.