By Viresh Vallabhbhai and Genevieve Neilson, Professionals in International Trade Policy Committee
The COP 26 Summit is about to begin. Both governments and businesses are firming up on their climate change commitments, based on the latest climate science. As part of this, governments are developing various legal mechanisms to discourage carbon-emitting behaviours.
Stakeholder pressure from investors, customers and financial institutions are also spurring businesses to increasingly realign their business strategies towards environmental, sustainability and governance (ESG) goals. 26% of CEOs now view ESG among the top three issues for their companies and improving supply chain sustainability is their top priority over the next two years.
Changes are being made globally to accelerate a worldwide transition to net-zero emissions. This includes how goods are transported, produced and priced. As a result, many carbon-intensive goods and services are already less competitive based on commitments to net zero. AGL, one of Australia’s oldest companies has already seen this result. Its market value plummeted 4-fold in less than 12 months, as stakeholders divested from an increasingly uncompetitive carbon-intensive mammoth. Its executives have learnt quickly that failure to reform comes at a far greater cost than they expected.
Responding to these pressures requires long-term strategies and a systemic approach.
So why change?
There is increasing pressure to trade in green products and services and understand climate as a financial risk. Ths includes the capital markets and the financial services industry. Australia is heavily dependent on international capital to support mining, manufacturing, real estate, and financial services. As the Reserve Bank of Australia and Treasurer Josh Frydenberg have stated recently, unless Australian companies comply, the country will become increasingly unattractive to global investors.
Free Trade Agreements
Historically, climate has taken a back seat to trade. Now, trade agreements are scrutinising carbon intensity and incorporating climate action provisions. For example, France recently called for no new trade deals with countries unless they are party to the Paris Agreement. It is now clear that our major trading partners and allies are prepared to use measures like tariffs and non-tariff barriers to influence the carbon content of exports.
The Role of Government
Our key economic partners, the EU, UK and increasingly the US are playing a leading role in enforcing climate action into commerce and trade. This means that Australian companies that fail to meet minimum standards set by international climate change agreements will find themselves trapped with multiple limitations to trade. Moreover, this could become reality sooner than many businesses think. The European Union, the world’s largest regional market, has already revealed its Carbon Border Adjustment Mechanism. Through this mechanism, the EU can punish products that contain higher levels of carbon.
Yet Australia is falling behind. The resources and agricultural sectors weigh heavily on our ability to maneuver politically. A 2021 Australian Institute report showed that federal and state governments are still continuing to subsidise fossil fuels. The recent UK-AU FTA is one of the most recent examples where a major trading partner has sought to include climate goals linked to trade but was pressured by Australia to weaken or remove them.
So, while many governments, major corporations, and investor groups have made public commitments, the real task will be how they execute climate action plans over the coming decades and whether the math stacks up to net-zero.
The UN’s recent grim assessment of national action plans demonstrates that lowering global emissions takes a whole-of-society approach. For Australia, that will particularly be the case if the country’s largest emitters across resources, energy, manufacturing and agriculture can act with greater ambition than government. Businesses in every sector can find opportunities – they just need to take a considered approach and know where to look.