Environmental Investing: Benefits, Opportunities and Long Term Value
Australia's economic future is intrinsically linked to the transition to a low carbon energy system. The nation's energy, transport, industrial, and indeed digital economies are all dependent on a reliable, affordable, and lower emissions energy source. This is set to become even more important for Australia as the impacts of climate change begin to accelerate, and an increasing number of energy markets become linked to decarbonisation.
Decarbonisation is now being recognised as an area of the economy where investing can yield financial rewards alongside the virtuous outcomes for the climate and the environment. This is encouraging a rethink in investing strategies at a governmental, institutional, and individual level.
Environmental Investing Can Help Address Australia's Growing Climate and Energy Risks
Australia is being increasingly shaped by climate and energy risks.
From record breaking heat waves, bushfires and prolonged droughts to coastal hazards such as king tides and sea level rise; these forces have begun to shape the nation's physical and economic environments.
At the same time, the nation's reliance on fossil fuels has placed significant strains on its physical infrastructure, presenting a set of additional risks to the economy and environment. These risks can be mitigated through investment in renewables, storage, and emissions reduction schemes. Environmental investing can assist Australia in reducing the impact of these economic, climate, and environmental risks.
Governments Cannot Fund the Transition to Low Carbon Alone
The transition to a low carbon energy system will require significant investment. Federal, state and local governments all continue to fund this transition, but for a range of reasons this has not been sufficient in funding the large scale grid connection, storage, and renewables generation that will be required to meet Australia's needs.
Both at a governmental and a private investor level, a recognition is now occuring that private investment in carbon markets, renewable energy, and methane abatement, will be required to complement the government's efforts. This has helped drive increased interest and investment in the space.
Environmental Investing Has Economic Benefits
Environmental investing often has an association with climate and nature-based outcomes, but has economic benefits as well. Strategic investment in areas such as renewables and low carbon can yield rewards for decades through reduced costs, job creation, reduced exposure to fossil fuel price swings and volatility, innovation, and long term business resilience.
The stability of a low carbon energy source can also open the door to a range of other economic opportunities. This includes not only opportunities in traditional heavy industry manufacturing, but also in the digital economy. These latter opportunities, which were previously overlooked, are quickly being recognised as being critical to future prosperity.
Natural Capital Can Supplement Other Environmental Investments
Natural capital can be seen as the natural assets that provide a range of services that benefit society and the economy. While some investments in natural capital is being made and does have a place in Australia's transition, it is not central to the environmental investing space. This is because, at least for now, most natural capital is a recipient of capital, rather than a generator.
The main opportunities for environmental investing in Australia are in renewables, storage and the transition to a low carbon and low methane energy system. Natural capital is a useful complement to this, and should be considered as such by investors.
Climate Related Financial Risks Are Driving New Investment Thinking
Climate related financial risks are becoming an important consideration for investors, with both physical and transition risks now informing investment decisions.
Physical risks stemming from extreme weather events, transition risks stemming from policy and regulatory change, supply chain disruptions, insurance cost increases, and the impacts on aging infrastructure are all beginning to reshape the investment landscape. Environmental investing helps mitigate the exposure to these risks by helping decarbonise portfolios and lessen the impact on vulnerable infrastructure.
For long term investors, this makes incorporating an understanding of these risks into their decision making processes an important way to de-risk their portfolios for the long term.
Environmental Markets Are Evolving To Offer A Range Of Opportunities
Australia's environmental markets are continuing to evolve and offer a range of entry points for investors. From carbon markets to methane abatement, grid scale storage, and green hydrogen, there are a wide range of opportunities for those looking to both decarbonise their portfolios and reap financial rewards.
Investment in these spaces can provide a financial return to investors, with some opportunities offering long term income streams.
Australia Needs Investment In Its Net Zero Transition
Australia has made a commitment to reduce greenhouse gas emmissions and transition to a low emissions economy. This transition will require investment in a range of areas, including renewables, storage, sustainable transport, methane abatement schemes, grid-scale and smart infrastructure, and low carbon industrial processes such as those used in the emerging data centre industry.
Environmental investing can help meet this need, not only for renewables and storage, but also by facilitating the development and commercialisation of innovation as part of the transition to net zero.
Biodiversity And Natural Assets Can Help Support And Protect The Economy
Australia is home to an incredibly diverse range of natural habitats and species. However, the country is currently at risk of losing this diversity, which would have economic impacts on both natural systems and human communities.
With this in mind, investments in biodiverse assets can help Australia not only address the decline of species and habitats, but also benefit the broader economy. Australia's Nature Repair Market is currently helping to drive this advantage, by helping to facilitate the entry of capital into the space.
It is also worth noting that while investments in biodiversity and natural capital can benefit the economy and environment, it is a small part of Australia's environmental investing story. The majority of the opportunities and value are being found in other areas, primarily in renewables and storage, supporting a low carbon transition for the country.
Environmental Investing Is Driving Innovation
The need to decarbonise and address climate change is encouraging a wave of innovation across a range of industries.
Environmental investing is enabling this transition by funding the commercialisation and adoption of new technologies that improve emissions performance, as well as supporting existing circular economy opportunities across a range of sectors. This will continue to provide economic, environmental, and social benefits to Australia for years to come.
Environmental Investing Offers A Range Of Benefits For Investors
Assets in the environmental space can offer a range of benefits to investors.
Firstly, they often have characteristics that distinguish them from other asset classes, helping to diversify a portfolio. The long term nature of many of these assets also means the rewards can be long term as well, spanning decades rather than months or years. This makes them an appealing option for long term investors seeking stable cash flows, while also helping to mitigate risk from other, more traditional, asset classes.
The other benefits for investors include reduced exposure to climate related financial risks and policy shifts, while also offering emissions reduction benefits and financial returns.
Environmental Investing Offers A Range Of Benefits For Businesses
Environmental investing can provide a range of benefits for businesses, from reducing emissions intensity and associated risks to providing long term rewards for strategic investment. It can also provide opportunities for innovation and diversification, as well as support for operations and long term financial performance.
With an increasing focus on decarbonisation from customers, investors, regulators and peers, businesses that make the transition will see long term rewards.
Environmental Investing Offers Economic And Climate Security For Australia's Future
Environmental investing is important to Australia's future prosperity and security. By directing capital towards the areas of the economy that will benefit the most from the transition to a low carbon, low methane energy system, while also supporting climate and natural capital resilience where applicable, Australia can best position itself to meet future challenges and opportunities.
Environmental investing in Australia is important both economically and environmentally. It helps to promote diversification and long term value capture by directing investment towards areas of the economy that are set to grow and provide long term benefits. By investing in renewables, storage, and emissions reduction, and supplementing this with natural capital investment where appropriate, Australia can build climate and economic resilience for years to come.
Frequently Asked Questions
Why is environmental investing important?
Environmental investing is important to Australia's economic future as well as its climate and environmental security. It is an opportunity to not only capture value in a changing economy, but also to decarbonise and invest in the future.
Why does Australia need private environmental investing?
Australia needs private investment in order to facilitate the large scale renewables and storage construction that will be necessary in the transition to a low carbon economy. This investment will complement government sponsored investment in carbon markets, methane abatement, and renewable energy, as well as natural capital in certain circumstances.
How does environmental investing benefit the economy?
Environmental investing can provide a range of benefits for the economy, from long term value capture to reduced emissions, job creation, and risk mitigation.
What industries benefit from environmental investing?
Renewables, storage, industry, the digital economy, natural capital, and indeed the broader economy can all benefit from increased environmental investment.
Can environmental investing generate financial returns?
Environmental investing can be a source of financial returns for investors seeking long term value capture. The ability to realise returns through this type of investment depends on a range of factors, including how the investment is structured. With that in mind, it is important to consider environmental investment in the context of financial risks as well.
Key Takeaways
Environmental investing matters because it has the capacity to yield long term economic benefits while also facilitating Australia's transition to a low carbon economy. As the impacts of climate change begin to accelerate, and energy markets evolve, investment in renewables, storage, and emissions reduction are set to become an essential part of not only Australia's future prosperity, but also its climate and environmental resilience.
Australia's carbon and renewable energy markets, alongside its methane abatement and low carbon infrastructure needs, represent an opportunity for governments, businesses, and private investors to capture value over the long term. Natural capital and biodiversity, while important parts of Australia's environmental investing story, are supplementary to the main investment themes that dominate the market. With the right governance in place, and underpinned by scientific rigour, environmental investing can help bolster Australia's transition to net zero for years to come.
Disclaimer
EnviroInvest Pty Ltd ACN 685 107 957 (“EnviroInvest”) is an Authorised Representative of Daylight Financial Group Pty Ltd ACN 633 984 773 (“DFGPL”) which is the holder of an Australian Financial Services Licence (AFS Licence No. 521404).
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