Treasurer Josh Frydenberg will prepare the way for Scott Morrison to take a target of net zero emissions by 2050 to Glasgow, when he warns on Friday capital inflow will be at risk if Australia is seen as a climate laggard.
“Australia has a lot at stake. We cannot run the risk that markets falsely assume we are not transitioning in line with the rest of the world,” Frydenberg says in a speech to the Australian Industry Group released ahead of delivery.
“Were we to find ourselves in that position, it would increase the cost of capital and reduce its availability, be it debt or equity”.
Frydenberg says there must be investment in emissions reduction in all sectors, including agriculture, mining, and manufacturing.
He firmly rejects the claim – advanced by some critics especially in the Nationals – that the resources and agriculture sectors will face decline in the transition.
“To the contrary, many businesses in these sectors are at the cutting-edge of innovation and technological change,” he says.
The government is set to finalise its revised climate policy after the Prime Minister returns from the United States.
Morrison, who has been pressed hard on climate by President Joe Biden and Britain’s Prime Minister Boris Johnson while in the US this week, wants an unequivocal stand on the 2050 target for the November Glasgow climate conference.
The government’s present formulation is that it is committed to net zero “preferably” by 2050.
Morrison has been negotiating with Nationals leader Barnaby Joyce on a deal which will contain a major pay-off for the minor Coalition partner.
Frydenberg says in his speech that in a long term shift “markets are moving as governments, regulators, central banks and investors are preparing for a lower emissions future”. He points out 129 countries have committed to net zero by 2050.
“Markets are responding as participants make their own judgements as to what this new dynamic means for their existing portfolios and their future investment decisions.
"In particular, they are increasingly focusing on the physical risks to their investments of climate-related events and the transition risk to their investments as consumer preferences, technological and regulatory settings change.
"As a result, trillions of dollars are being mobilised globally in support of the transition.”
One of Australia’s major banks in the last year has coordinated more than 50 transactions worth $100 billion in climate finance related activities.
“Increasingly, institutional investors are themselves committing to the net zero goal, like BlackRock, Fidelity and Vanguard, three of the biggest fund managers in the world. For them, there is an alignment between the commercial opportunities and the environmental outcomes.”
Frydenberg emphasises the importance of Australian markets operating effectively, with investors able to make informed, timely decisions, and capital available at the lowest cost.
He says historically, Australia has relied heavily on imported capital, whether foreign investment or wholesale funding of the banking system. Foreign investors hold close to half the Commonwealth government bonds.
Reduced access to these capital markets would raise borrowing costs, affecting everything from the interest rates on housing and small business loans to the financial viability of big infrastructure projects, he says.
Frydenberg says Australia is addressing the challenges on two fronts.
Regulators have focused on the disclosure of material financial risks relating to climate change and promoted a best practice financial framework. And Australia is making progress in meeting its emissions reduction targets.
“To go the next step and achieve net zero will require more investment across the economy,” Frydenberg says.
“An economy-wide transition is needed, as in the words of the former Governor of the Bank of England, Mark Carney this ‘isn’t about funding only deep green activities, or blacklisting dark brown ones’”.
Frydenberg says “opportunities will abound and it will be those businesses that recognise these trends and put plans in place to adapt that will have the most promising futures”.
He says the message to Australian banks, super funds and insurers is “if you support the objective of net zero, do not walk away from the very sectors of our economy that will need investment to successfully transition.
"Climate change and its impacts are not going away.
"It represents a structural and systemic shift in our financial system, which will only gain pace over time.
"For Australia, this presents risks we must manage and opportunities we must seize.”