Decarbonisation is daunting, no matter how you look at it. However, two new Deloitte reports look at how we can transform our economies in our pathway to net zero | Content Partnership
Climate change need not be a story of economic doom and gloom. There’s significant upside in getting New Zealand’s response to environmental threats right. Decarbonisation could be a new economic engine if there’s a coordinated, early approach, led by the financial services sector.
This is the guidance from two new Deloitte reports, which estimate that as much as US$1.6 trillion could accrue to Australia and New Zealand by 2070 if we can keep emissions to 1.5C or lower.
Deloitte NZ Partner Grant Frear says the analysis is refreshing.
“We often stare into the abyss of the losses ... and we see can a pathway to net zero, but very rarely do we look on the other side, to see the businesses, roles, skills and technology which can be created.”
The reports, All Systems Go from Deloitte’s Australian Access Economics Group and Turning Point from the Asia Pacific team, are clear. Doing nothing is not an option, we have to transform our economies. In APAC, the response is the difference between a US$47 trillion economic gain for the region by 2070, versus a US$96 trillion loss (in NPV terms).
Deloitte NZ Climate and Sustainability director Rikki Stancich articulates the opportunity.
“If we do nothing, the cost in social, planetary, and economic terms is phenomenal, but if we take early, decisive and bold action, there will be enormous benefits for the region.”
The changes proposed are at the 'systems' level: to energy, mobility and manufacturing as well as land use and food production. The intent is not to reduce emissions business-by-business in those sectors, but to take a coordinated approach across a value chain.
An example of such an approach in the energy system could be where finance is channelled into enablers, like utility-scale renewables and hydrogen infrastructure, which are mutually reinforcing investments that ultimately support a shift to green logistics. Or for the land use system, it could be investments into regenerative farming solutions that bolster soil carbon sequestration while boosting land productivity.
Each country will have its own challenges and high emitting 'systems' to address. In New Zealand, emissions from the land use and food production system are greater than those of our neighbours, while the need to reduce process heat through the manufacturing system is lower.
Stancich says the financial services industry has a key role to play in supporting an ‘orderly’ transition of businesses to a low-emissions economy, through an emerging range of incentives-based sustainable finance products such as sustainability-linked loans. The public and private sectors can play a complimentary role in channelling capital and accelerating the shift to a decarbonised economy in line with our 2030 targets, she adds.
New Zealand Green Investment Finance (NZGIF) is a key part of this. The government-backed investment bank, set up to accelerate investment into companies and projects that support the transition, plays the role of ‘first loss lender’ as a means of de-risking novel technologies, and by doing so, crowding in investment. Craig Weise, NZGIF's CEO, agrees a collaborative approach is important.
“Clearly there’s a great need for capital to make change faster. The financial services industry has a large and evolving role. Don’t forget the sector is also on an emissions-reduction journey itself. It really needs to create and deliver attractive products to investors while considering how it can make available primary capital sooner. New Zealand is rare in that the banking sector here provides 70 percent of primary capital, compared to around 40 percent in other economies.”
It's a nice idea, a coordinated approach to change, but we all know that can be hard to achieve. So how does it happen and who coordinates?
Deloitte and NZGIF both believe our banks have a vital part to play. Stancich says New Zealand banks have a stewardship role as well as one of risk management, on three fronts: product, policy and governance.
“Banks can provide incentives such as discounted lending rates for companies that achieve agreed ESG (Environmental, Social and Governance) targets; or conversely, penalties for non-performance. This helps banks to both decarbonise their lending portfolios, and to play a stewardship role through working with companies to reset risk appetites by setting agreed, performance-based targets against which sustainable outcomes can be measured.”
Weise says there are some big changes in outlook required by the banking sector if it is to really support decarbonisation.
“Unlike other crises, the climate crisis has been creeping. So we haven’t applied the tools we would use for a crisis. And the problem is getting worse. Because this is about changing the system, you’ve got to get alignment of the actors and that will continually be a challenge in terms of speed.”
Collaborating on the creation and adoption of new banking products for example could pose competition issues, but these are the sort of rules that need to be cast aside in a crisis Weise says.
An industry led Responsible Stewardship Code for Investment has recently been developed which clarifies the fiduciary duties on financial services companies and requires an ESG component to investment. In addition, new legislation is coming into effect in December which will make climate-related disclosure mandatory for more than 200 large, listed companies, insurers, banks, and investment schemes as well as some Crown entities. The disclosure regime is intended to drive capital and investment towards low emissions activities.
Head of Sustainable Finance at the Bank of New Zealand, Adam Coxhead, says consistent and comparable measurement and reporting frameworks are needed so banks can be assessed on the sustainability of their portfolios. He agrees that banks’ lending and investment criteria need to evolve to drive a transition to low emissions.
Asked about banks’ role to steward large emitters through the crisis, rather than 'de-bank' them to make their own ESG portfolios look good, Coxhead is unequivocal.
“The most impactful thing banks can do for decarbonisation is to support their existing customers on their path to net zero. The first step banks should be taking is to understand their customers and their transition plans and support them in making progress towards that plan.”
Deloitte would love to see the banks take a fundamental step change in this direction.
“What would it take for the funding of decarbonisation to be the competition battleground, rather than residential mortgages?” Frear muses.
Coxhead argues the data arising from the new legislative requirements will drive greater competition.
“There will be significant competition between banks as banks seek to decarbonise. We expect this to lead to a lower cost of capital for customers.”
The All Systems Go report points to a 'Great Reallocation of Capital' in the coming decades be it in new investment in companies and products that reduce emissions, shifting existing capital from high- to low-emitting companies, or the structural changes required in systems, such as in energy and mobility, a move to hydrogen-powered or electric cars.
And on the quantum required for a successful transition here in New Zealand? The Government’s first Emissions Reduction Plan requires billions in the next four years alone. Weiss says exact numbers aren’t the issue.
“Put simply, it’s heaps.”
Enormous numbers can make change feel overwhelming, but Frear says there are tangible actions businesses can take to play their part and begin to realise some of the gains of adaptation.
“Small to medium enterprises may find they lack the expertise to determine their future emissions liability. Consider whether, if you had a pathway to decarbonise, what that would look like and then what you could do if you had capital to make it happen. Support your business case by looking at your exposure and the cost of offsets, versus the benefits of lower emissions. Then go and talk to your bank, which is connected to other businesses like yours and can give you advice and guidance.”
*This is the first in a three-part partner content series with Deloitte
