ESG Focus: The Little Big Things -16-06-2025

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FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Latest updates and news on major ESG issues against the background of shifting macro and political sands.

-Estimated impacts on GDP and industry according to variable decarbonisation pathways
-Latest environmental and climate related news in May
-Carbon capture and storage, part of the low emission energy solution for data centres
-Emission targets and decarbonisation plans post Labor’s Federal electoral victory
-Sustainability flows of funds down, but not out

By Danielle Ecuyer

Introduction to NGFS and its Focus

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) was established in 2017 and is a voluntary commitment from a group of Central Bankers and Supervisors to develop and share best practices and contribute to environmental and climate risk management in the financial sector.

The NGFS consists of 145 members across 90 countries, with 22 observers. Membership covers 100% of global systemic banks and 80% of international active insurance groups. The latest NGFS works focus on climate-related shocks that, according to Morgan Stanley, could have “significant economic disruptions within five years”.

The significance of this work lays in the near-term nature of the time frame, which encompasses the usual holding period for investors, opposed to longer-term frameworks and models up to 2050.

The scenarios modeled are “Highway to Paris” ,“Sudden Wake-Up Call”, “Diverging Realities” and “Disasters and Policy Stagnation” ; all are designed to allow investors to consider and risk-adjust possible outcomes out to 2030.

Scenario Summaries by Morgan Stanley

Morgan Stanley’s summary for the scenarios is as follows:

-Highway to Paris: Transition risk only, orderly transition including carbon taxes reinvested into green subsidies and investments. Short-term impacts on economic growth are offset by higher returns on investment, with consumers and investors tilting toward the green sector. High-polluting sectors will experience rising credit risks and capital costs.

-Sudden Wake-Up Call: Transition risk only, disorderly transition. A scenario in which there is a “Climate Minsky Moment” when a wave of financial instability arises as asset prices adjust quickly to a sudden alteration in policy preferences to a green focus. A steep rise in carbon prices results in supply shocks.

-Diverging Realities: Both transition and physical risk. The bifurcation of the world with developed economies advancing to net-zero transition (North America, Europe, Oceania, and parts of Asia) contrasted with the rest of the world beset by extreme weather events, which impact global trade, supply chains, and spillover to the developed economies’ cost of transition.

-Disasters and Policy Stagnation: Physical risk only. Extreme weather events transpire over 2026 and 2027 resulting in capital destruction, lower productivity, and flow-on economic impacts.

Economic Impact Summary

Summarising the possible impacts across multiple factors, Morgan Stanley details:

-GDP will decline by up to -2.68% under Diverging Realities, with the Highway to Paris scenario at -0.46% GDP impact by 2030.

-Renewable energy investment increases by 79% to around US$800bn by 2030 in both Highway to Paris and Sudden Wake-Up Call from a baseline of US$214bn. Under Diverging Realities, investment rises 45% to US$292bn.

-The weighted carbon price under a baseline scenario in 2030 is US$54, but NGFS estimates under Sudden Wake-Up Call, the weighted carbon price would rise to US$163 in 2030.

-Credit risk significantly rises for high-emission sectors in Highway to Paris, Sudden Wake-Up Call, and Diverging Realities, while credit risk for green sectors falls in Highway to Paris due to increased investments.

-Physical risk causes short-term spikes in default probabilities across all sectors, with capital-intensive sectors like coal production, power supply, and agriculture being notably impacted.

-Trade overall is negatively affected in physical risk scenarios and becomes more severe and long-lasting in the Diverging Realities scenario.

Corporate ESG News in May

Macquarie’s Australian monthly ESG focus detailed some of the latest corporate updates, including SGH Ltd‘s ((SGH)) Investor Day, where the company formerly known as Seven Group Holdings outlined its revised emission targets due to the inclusion of Boral.
SGH’s interim target for Scope 1 & 2 emissions intensity reductions from the FY20 base year out to FY30 is -40% for Westrac, -30% for Boral, and -40% for Coates.

The company’s ambition to achieve net-zero has been pushed out to 2050 from 2040 previously.

Macquarie has observed several companies revising emission targets due to challenges around the cost of projects, skilled labour availability, and delays in transmission infrastructure. The analyst will be looking over the August reporting season for any further evidence of this trend gaining momentum.

Westpac’s Updated Climate Change Position

Westpac ((WBC)) outlined at the end of May an updated Climate Change Position Statement, which included customer transition plans for the metallurgical coal and coal-fired power generation sectors (previously it was only required for the oil and gas sector).

The bank removed the commitment to not provide project finance or bond facilitation for the expansion of oil and gas fields, with a restriction remaining on greenfield oil and gas projects.

Regarding the customer transition plan criteria for lending and bond facilitation, Westpac has moved to allow alignment to a “well below 2 degrees Celsius pathway” from 1.5 degrees Celsius previously.

Compared to CommBank ((CBA)) and National Australia Bank ((NAB)), which also require transition plans to align well below the 2 degrees Celsius pathway, ANZ Bank ((ANZ)) is now the only major bank requiring 1.5 degrees Celsius alignment.

Macquarie also notes the Net Zero Banking Alliance has softened its requirement on 1.5 degrees Celsius alignment to the goal of well below two degrees Celsius, similar to Westpac.

Environmental News in May: US Legislative Actions on Green Tax Credits

The US House of Representatives narrowly passed a tax bill, known as the ‘One Big Beautiful Bill,’ which proposes the early termination and phase-out of green tax credits under the Inflation Reduction Act for clean energy production, consumption, manufacturing, and investment.

-Tax credits for electric vehicles, clean hydrogen, home energy efficiency improvements, and clean energy tax credits will expire at the end of 2025.

-Wind energy components will no longer be eligible for credits from 2028, while tax credits for the manufacturing of components of clean energy will expire from 2032.

-Clean energy production and investment credits will only be available for facilities under construction and in service by the end of 2028.

-Tax credits for carbon sequestration are maintained, with credits for low-carbon transportation fuels extended by four years to the end of 2031.

The tax bill is now being considered by the US Senate, and the aim is to deliver the bill to President Trump by July 4.

Interestingly, since the Inflation Reduction Act in late 2022, some US$321bn has been invested in clean manufacturing, power production, and industrial facilities, Macquarie explains, with an outstanding US$522bn of investments.

In terms of Australia, there is longer-term opportunity, but the analyst proposes subsidies would be needed to make the economics of low-carbon energy technologies like green hydrogen commercially possible.

Australian Carbon Credit Unit Scheme (ACCU)

The Australian Government’s new draft Australian Carbon Credit Unit Scheme’s (ACCU) landfill gas method outlines the rules for crediting emission reductions from landfills, with Cleanaway Waste Management ((CWY)) the only listed company with landfill gas abatement project exposure at its Banksia, Kemps Creek, Stawell, and New Churn LFG (landfill gas) flaring projects.

Turning to renewable energy projects, VicGrid released the first draft of the 2025 Victorian Transmission Plan for the next 15 years, including seven renewable energy zones and four new transmission lines to assist Victoria’s transition to 65% renewables by 2030 and 95% by 2035.

Regarding Future Made in Australia, the government announced $46m in funding to scale up the production of Maverick solar units at an Adelaide facility as part of the $1bn Solar Shot Program, which will enable 200MW production over three years and underpin 50 jobs.

Carbon Capture and Storage (CCS) Back in Focus

Renewed interest in carbon capture and storage (CCS) in the US is largely being underpinned by future growth expectations for data centers. Morgan Stanley estimates the carbon footprint from global data center build-outs to be 2.5Gt by 2030.

Within that context, the analyst believes hyperscalers will retain their commitment to try to achieve net-zero emissions, including further investment in clean tech solutions with CCS a possibility as gas-fired power generation is one of the solutions to energy generation for data centers.

The pipeline of CCS in the US is estimated to advance to 556Mtpa of capacity by 2030, with 17mtpa expected in 2025, with support from the 45Q tax credit, which has been retained in the recent IRA cut.

Natural gas production, processing, and power generation are the greatest industry emission sources, with an estimated 23% contribution to total pipeline capacity.

US legislation also allows for state primacy over Class VI permits (CO2 injection). The primacy enables states to initiate the planning process for wells. West Virginia is the fourth state to obtain primacy, following North Dakota, Wyoming, and Louisiana. Arizona and Texas are in the last stages of obtaining primacy.

In Europe, Morgan Stanley explains the interest in CCS emanates from the incoming carbon adjustment mechanism (CBAM), which is due to commence in 2026.

The aim of CBAM is to move decarbonisation beyond the power sector to industrial sectors as carbon-free allowances are phased out. Cement production is one example where CCS is the only solution given current technologies to remove emissions.

In terms of stocks classified as ‘proprietary technology providers’ and ‘capture solutions providers’, which have the highest exposure to the technology, the stocks rated by Morgan Stanley as Overweight include Baker Hughes, Bloom Energy, Chart Industries, Exxon, GE Vernova, Linde, Mitsubishi Heavy Industries, Occidental, and Shell.

Australian Election Results and Transition Roadmap

With a super catchy title “Ready, Set, Transition”, UBS emphasizes the re-election of the Australian Labor Party “cements” Australia’s transition roadmap to 2030.

By way of history, in 2022, the government legislated a reduction in emissions target of -42% by 2030 with a target for renewable energy of 82% by 2030.

Currently, Australia has 40% renewable energy, with the Capacity Investment Scheme (CIS) seeking to underscore 23GW of new renewables generation and 9GW of storage, which will cover the gap to the 82% target.

UBS continues to envisage support for renewable energy capacity for AGL Energy ((AGL)), Origin Energy ((ORG)), and grid-exposed companies Downer EDI ((DOW)) and APA Group ((APA)).

Flow of Funds

RBA Capital highlights ongoing outflows from sustainable equity funds in 2025, although outflows have slowed from March lows, with headwinds for US funds due to the more challenging political backdrop and volatility for European funds due to the continued implementation of (anti)greenwashing regulations.

Europe represents around 80% of sustainable funds, and the analyst views this geography will determine the trends.

Climate transition funds continue to see inflows for 2025 based on thematic, with outflows notably more robust for Impact/SDG (Sustainable Development Goals), Clean Energy, and Environmental Solutions funds.

Outflows have been slowing for Health & Wellbeing, Sustainable Ag & Food, and Circular Economy funds.

The Nuclear Power theme was a standout in May, with most energy transition themes outperforming in the first half of the year to date, but faded when the US budget reconciliation bill was passed due to cuts to clean energy tax credits.

In terms of performance, actively managed global and US sustainable funds slightly outperformed traditional fund peers, but overall, sustainable funds are lagging year-to-date versus traditional funds.

FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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