Australia’s Economic Revival: A Race We Must Win Through Sustainable Finance
The starting gun has fired in the global clean energy race and Australia stands at a crossroads – will we soar as a competitive force or falter at the starting line?
Worldwide there is a scramble for capital to fuel the transition to a cleaner global economy and governments are locked in fierce competition, vying for investments crucial to sustainability.
A year ago a game changing move was made with the introduction of the US Inflation Reduction Act (IRA), a resounding $580 billion investment pledge in clean economy sectors. The seismic ripple effect was immediate. A staggering $350 billion surge of fresh investment has been reported within the first year, turbocharging clean tech and semiconductor industries and spawning 100,000 jobs. This isn’t just policy, it’s a global economic revival.
But it’s not just America’s race. Europe is sprinting forward, with its Green Deal Industrial Plan committing a staggering €300 billion. Canada responded with an CAD$80 billion budget allocation, embracing the IRA’s clarion call and the United Kingdom Chancellor is also preparing to answer the IRA’s challenge.
Australia isn’t lagging behind, it’s off the blocks. The Clean Energy Finance Corporation’s decade-long investment of $11 billion and recent commitments like the $15 billion National Reconstruction Fund unveil a blueprint for economic rejuvenation and an increasingly comprehensive set of legislative measures are emerging. But, is this enough?
How Australian pensions could fuel sustainable growth
One critical lever that is yet to be fully activated is Australia’s financial system. A unique asset of our economy is the large pension fund pool of capital, sitting currently on $3.5 trillion of assets, one of the top five largest pension markets in the world.
The government has an opportunity to rapidly move on these, by supporting existing industry efforts that have become de facto standards in this market, such as the Responsible Investment Association Australasia’s (RIAA) Certification Program.
There remains an opportunity to unleash our capital markets domestically that are right now ready to scale up fast in deploying a tidal wave of capital required to drive our own economic transition, one that creates the industries and jobs of the future.
The Treasurer is currently putting the final touches on a high-level Sustainable Finance Strategy. Done well and with appropriate ambition, that recognises the global race that is underway, this strategy has the potential to be part of the response we need to remain in the race.
The Treasurer’s imminent Sustainable Finance Strategy isn’t just a strategy, it’s a turning point for Australia. A blueprint that galvanises policies, institutions, and financial engines, sending a strong message to private capital, Australia is a heavyweight contender in the global clean energy race.
Key building blocks of a successful Sustainable Finance Strategy
Foreshadowed for this strategy are some key elements that we need to get right. Ensuring the strategy shows a clear path on the establishment of a sustainability taxonomy, one that better classifies the clean and transition assets we need to invest in is essential, and must be based on science and established with integrity.
A focus on eliminating greenwashing should certainly be part of this strategy, as greenwashing undermines the potential of sustainable investments. However, this should not be the end point of the strategy or over emphasised at the expense of the focus we need to unlock capital flows towards sustainable businesses.
A sovereign green bond program is another key plank flagged for this strategy. With issuances of green and sustainability bonds likely to reach $5 trillion by the end of 2023. This will be a key mechanism to attract capital willing to flow to sustainable assets and currently this is a significant pool of funds that Australia is not attracting.
Governments globally are helping to support classification systems for investment funds that are supporting sustainable businesses, to more clearly earmark those sustainable investments, and make it easier for investors to direct their capital with confidence. The government need not reinvent the wheel, and should instead be accelerating the existing industry efforts to classify and standardise fund labels.
These sustainable product labelling requirements are a means of both supporting the elimination of greenwashing, and the bigger goal of seeing more capital flow into sustainable investments.
The road ahead for sustainable investment
To oversee this strategy, the government needs to establish a Sustainable Finance Advisory Council, a cross-sectoral roundtable that ensures all parts of government, finance and business are aligned, and held to account on the core principles of the strategy. A cross-sectoral group will ensure that the good work done in one sector is not held back by another, inadvertently acting as a hand brake.
To unlock this tidal wave of capital, the financial markets need to see the strongest and clearest signal of Australia’s commitment to this global race.
The first year of the US Inflation Reduction Act has shown the world that with the right reforms, we can drive the kind of rapid change needed to respond to the global challenges before us.
About The Responsible Investment Association Australasia (RIAA)
RIAA is dedicated to ensuring capital is aligned with achieving a healthy society, environment and economy. With over 500 members representing US$29 trillion in assets under management, RIAA is the largest and most active network of people and organisations engaged in responsible, ethical and impact investing across Australia and New Zealand.
About Simon O’Connor
As the CEO of RIAA, Simon operates at the intersection of economics, finance and sustainability and has extensive international experience as an economic adviser, investment analyst and sustainability consultant across finance, corporate and not for profit sectors.
This article was first published by The Fifth Estate on 24 August 2023.