Zero Carbon: Time for industry to pull its finger out
This year is shaping up to be a banner one for New Zealand’s response to climate change. The Zero Carbon Bill is before Parliament, the Emissions Trading Scheme is to be reformed by the end of 2019, and the Budget earmarked additional funding for climate mitigation steps.
Industry is stepping up too. This week marks one year since the formation of the Climate Leaders Coalition, a group now numbering more than 100 leading NZ companies representing more than half of NZ’s carbon emissions. These firms have committed to measure, report on and reduce their emissions of greenhouse gases like carbon dioxide, methane and nitrous oxide.
Air New Zealand, for example, has improved the fuel efficiency of its fleet by 21 percent since 2009, saving them both money and emissions. Toyota, Fuji Xerox, Fonterra, Sky City and The Warehouse Group are among many others.
But there’s a lot more to be done.
Dairy company Synlait has rolled out the country's first large-scale electrode boiler, saving nearly 10,000 tonnes of coal per year. That’s a start, but given NZ mines more than three million tonnes of coal per year, a start is hardly where we need to be. Fonterra is trialling using wood chips at its Te Awamutu processing facility, as well as a wood chip and coal mix at Brightwater near Nelson. It is converting its cheese factory near Balclutha from coal to electricity. However, it says its intentions are to continue installing coal boilers for a further 11 years, until 2030.
Some of New Zealand’s largest emitters are seeking special treatment in the pending reforms to the emissions trading scheme. (See this Rod Oram piece on Newsroom. ).
Firms like this can and need to do more.
Emissions still rising.
In calendar 2017 (the most recent figures available) New Zealand’s emissions had not even turned the corner. The Paris Agreement commits NZ to reducing greenhouse gas emissions by 30 percent below 2005 levels by 2030, but astonishingly, and dangerously, our greenhouse gas emissions are still rising.
It’s time for big emitters of carbon dioxide and other greenhouse gases to push harder to lower their emissions.
It’s just good business. The shareholders of the big companies that are NZ’s largest emitters (as well as their other stakeholders such as customers, employees and local communities) will be asking harder questions. And they are well-placed to do so. For example, the Australasian Investor Group on Climate Change represents AU$2 trillion of assets owned by institutional shareholders, including the NZ Super Fund.
But more importantly our trading partners will demand change. In the US, front-running Democratic Party Presidential Candidate Joe Biden has a policy of imposing “carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.” There’s a risk our methane-enriched milk production and nitrate-heavy meat production will be tariffed, taxed and quota’d into uneconomic oblivion.
It is clearer every day that the economy and the environment are mutually complementary.
Global consultancy Mercer predicts a stock portfolio in a world aiming for no more than a 2 degree temperature increase, and oriented towards sustainability, will deliver an additional 1.6 percent returns per annum by 2030. As carbon gets closer to being correctly priced in, investment returns in oil and gas will be 7.1 percent lower per annum by 2030 while returns on renewable energy will be 6.2 percent higher per annum. (See this Financial Times piece).
An appropriate response to climate change is now part of a corporation’s social licence to operate. The investment case for change gets better each year but one area where there is a clear gap is equity finance.
The authors are aware of a number of projects which could offer major reductions in emissions of carbon dioxide, which have so far been unable to attract investment capital. It’s time for our investment community to step up. See this Australian Financial Review story).
What’s stopping investment?
Accelerating investment into emissions mitigation is difficult. Large funds, including NZ Super, are primarily concerned about economic returns, with most seeing reducing carbon emissions per se as not an acceptable investment. Our government investments meanwhile, for example through the new NZ Green Investment Finance fund as well as the One Billion Trees programme, are welcome, but insufficient.
Meanwhile, we do not have a realistic value for carbon, and the future price of carbon is not being priced into deals. How would we value, for example, a dairy company if its CO2, methane and nitrous oxide emissions were correctly valued and charged? It’s likely those coal powered driers would be rapidly removed.
We are slowly seeing funds which are investing in listed securities change the game, incentivising the companies they invest in to change their behaviour. One initiative from larger funds was the recent letter to the G20 from investors representing over $34 trillion asking governments to stick to the Paris Agreement.
The local market for green bonds, meanwhile, is small but developing well. In the past year, Auckland Council, Contact Energy and Westpac have issued around $1 billion in green bonds, which offer a fixed rate of return and guarantee a positive environmental impact.
But we need private equity capital to invest in proven technology to drive economic returns with emissions reduction, and we need venture stage capital to invest in unproven technology and bring it to scale.
Emissions reductions projects come in many shapes and sizes. Some could be New Zealand implementations of technologies well-established elsewhere, like large scale battery storage. Others could include expansions of energy sources which are already well-known in NZ (such as wind power), accelerating moves to de-carbonise automotive transport, or retro-fitting commercial buildings to a higher green standard.
While there is great potential for entirely new R&D to help mitigate climate change, we see that venture capital funds offer a higher risk profile, uncertainty around impact and returns in this space. With ample opportunity to reduce emissions and deliver returns with existing technology, we see the greater investment needs to be at a later stage, with $50-200 million placements.
Those placements would be into a range of companies and projects, and a tailored investment approach would be needed. With the normal private equity and project finance disciplines, the fund would require the ability to assess climate risks and to capture the rewards of climate mitigation.
There is an opportunity for an industry-wide response, and we are starting to speak to potential fund managers, investors and staff. It’s not a question of whether New Zealand responds, but how.
Hopefully we will look back on 2020 as the year New Zealand set a new benchmark for industry’s response to climate change. With a little luck and some sweat, we will be able to celebrate that we also found a model to unlock the investment needed to address this existential issue for humankind. Our children will thank us for it.
Rohan MacMahon is an Auckland-based management consultant with Wollemi Consulting. Lance Wiggs is a venture capitalist, and, through LWCM, manager of Punakaiki Fund.