Australia is, in many ways, a country on the frontline of the climate crisis. This unfortunate reality is starting to be reflected in its approach to private markets investing.
Australia is expected to push hard on the climate agenda under its new Labor government. In June, Prime Minister Anthony Albanese unveiled plans for a newly combined Department of Climate Change, Energy, the Environment and Water to advise the government on climate policy and its 2030 emissions target, which is more ambitious than the previous administration’s.
Perhaps the clearest example of the climate clash between the parties, and where the Coalition stood on climate change, was in 2017 when then-treasurer – now-defeated PM Scott Morrison – waved a lump of coal in parliament, urging Labor not to be afraid of it.
Largely downplaying the impact of fossil fuels and the urgency of meeting net-zero carbon emission targets has been a stance that has placed Australia far behind other developed countries in the global effort to tackle climate change. Ultimately, it also proved detrimental for the Coalition in an election where climate change appears to have played a key role in securing votes.
The climate issue in Australia has become harder to ignore. “Recent events, including the scale and intensity of the summer bushfires of 2019-20, and the severe coral bleaching impacting the Great Barrier Reef that occurred in three of five years from 2016, demonstrate just two of the consequences of a warming planet for Australia’s people, economy, and environment,” John Shine, president of the Australian Academy of Science and a professor at the Garvan Institute of Medical Research, said in a report last year.
Private markets participants are beginning to respond, and for good reason: as of December 2020, an estimated 60 percent of Australia’s national emissions came from companies outside the ASX 300, according to the Clear Energy Finance Corporation.
IFM Investors, for example, is in the process of raising a debut growth fund that aims to accelerate emissions-reduction activities in Australian portfolio companies, according to a February statement from the CEFC. Its targets in the Australian technology, business services and healthcare sectors will be chosen based on their potential to drive a material reduction in emissions and to capitalise on the transition to net zero by bringing new technologies and business models to market. The fund has already attracted commitments from the CEFC and superannuation funds HESTA and Legalsuper, among others.
In January, the Melbourne-headquartered firm announced that all companies in its private equity portfolio had achieved carbon neutrality, as certified by Climate Active, which represents the Australian government’s certification standard. “Cultivating purpose-driven cultures, promoting fair and inclusive workplace practices, and reducing our portfolio’s carbon footprint are key elements of our responsible investment approach and integral to creating value for our investors and their members and beneficiaries,” IFM’s private equity head, Stuart Wardman-Browne, said in a statement at the time.
IFM’s focus on carbon emissions echoes that of Adamantem Capital, whose sophomore fund was billed by the CEFC – which committed A$80 million ($56 million; €53 million) as a cornerstone investor in 2020 – as the first Australian private equity fund to adopt a “cradle to grave” approach to the emissions impact of its assets. All the companies that the fund acquires are required to implement emissions-reduction targets that aim to either eliminate or offset their emissions within a decade. Adamantem Capital Fund II raised A$794.8 million against a A$700 million target last year, according to Private Equity International data.
“We want the [private equity and venture capital] sector to lift its emissions-reduction ambitions to new levels,” CEFC chief executive Ian Learmonth said at the time of its commitment. “Working with an industry leader like Adamantem provides an opportunity to catalyse real change by improving the sustainability profile of mid-market companies across a diverse range of assets. In a highly competitive sector like this, the successful implementation of a leading sustainability agenda by Adamantem will drive an increased focus on sustainability across the private equity sector.”
Institutional investors are also taking action. Aware Super, one of the country’s largest superannuation funds with A$158.6 billion of assets under management, in 2020 approved its Change Portfolio Transition Plan – a framework of recommendations and targets designed to develop a decarbonisation pathway for its portfolio and achieve net-zero emissions by 2050. These efforts include divesting from thermal coal and pushing into renewables.
“We know that climate change poses one of the most significant financial risks to our portfolio and our members’ retirement savings in the long term,” Jenny Newmarch, a senior portfolio manager for private equity growth assets at Aware Super, said that year. “We believe we can generate strong long-term returns while also supporting the economy to transition.”
Renewables is one corner of private markets that could benefit most tangibly from Australia’s new government. As recently as April, a Clean Energy Council report found that the level of investment in new large-scale renewable energy projects in the country fell by more than 17 percent last year. Investors cited ongoing policy uncertainty and problems connecting renewable energy projects to the grid as the main reasons behind the significant drop in the number of projects in the pipeline.
Labor, however, has already stated its commitment to upgrading the electricity grid and setting a renewable energy target of 80 percent of the country’s electricity mix by 2030, from 32.5 percent currently. As David Scaysbrook, co-founder of Quinbrook Infrastructure Partners, said in a May media briefing, the new guard and expected transformation in policy should bring about the certainty investors have been looking for.
“As someone focused on the green economy, this is the most hopeful that we have been in a decade in being able to increase the significance of Australia as a market for future investment,” Scaysbrook said. “What we’ve been struggling with for so long here in Australia, and why we have been so despondent, is the lack of the details in the rules and regulations to create the right conditions for long-term investment for institutional capital.”