3. Climate Change
and the Global Push to Decarbonise

3. Climate Change and the Global Push to Decarbonise

While the ebb and flow of geopolitics and macroeconomics continue to influence supply chains in the near- to medium-term, and will remain prominent, climate change and the ongoing push to reduce emissions and embrace the broader ESG agenda could well match the first two influences on the international trade landscape over the long term.

Climate change has increased the frequency of extreme weather events, including wildfires, heat waves and floods, around the world.³⁶ The past nine years (2015 to 2023) were the hottest since records began,³⁷ oceans are warming along with the planet,³⁸ and 2023 was the hottest year on record.³⁹

These shifts carry a significant potential human and fiscal cost, and could physically disrupt trade networks and transport infrastructure, including maritime routes through which the bulk of international commerce is conducted. For example, the Panama Canal now restricts the number of ships it can handle as nearby lakes dry up, affecting its ability to operate at full capacity. Meanwhile, similar disruptions have occurred elsewhere with, for instance, China’s Yangtze River – a crucial link in domestic and international trade⁴⁰ – suffering from receding water levels.⁴¹

From agriculture to construction to manufacturing, the impact of a warming planet is being felt across sectors.

“As climate change drives a progressively larger wedge into free trade, the efforts to build resilience will only grow as an influence on supply chains. This will have a major impact on the nature of trade and how that’s conducted.”

Richard Yetsenga – Chief Economist and Head of Research, ANZ

With the planet’s natural resources depleting at record rates and more than half of global GDP (around US$44 trillion) dependent to some extent on nature and its ecosystems,⁴²conserving biodiversity is crucial to sustaining not only the future of economic growth but our way of life. There is growing recognition of the urgency for change, with many corporate leaders around the world moving sustainability to the top of their agenda not only to differentiate themselves from the competition but also to secure future growth by building resilience against climate and nature risks.

CEOs are stepping up as advocates for sustainability

FINDING OPPORTUNITIES IN ADVERSITY

The need to build resilience and grow sustainably has led to a number of ongoing initiatives. Along with the global push – led by governments and private entities⁴³ – towards decarbonisation, regional programmes range from overhauling land-use practices in Italy to harnessing solar power in Africa to protecting coral reefs in the Americas,⁴⁴and meeting the UN’s 17 SDGs.⁴⁵

Efforts are also underway to develop the capability to track the emissions of every entity in the global supply chain as emerging disclosure obligations require more businesses to track and disclose emissions. These include Scope 1 emissions which occur from sources the business owns or controls, Scope 2 emissions which cover the indirect emissions related to the energy a business buys from its energy provider, as well as the more complex and hard-to-measure Scope 3 emissions which cover upstream and downstream emissions from its suppliers and from its customers’ use of its products.⁴⁶

Yet another example is that of the Carbon Border Adjustment Mechanism (CBAM) – the EU’s latest regulatory initiative – which taxes the import of carbon-intensive products, such as cement, iron and steel. This measure requires businesses to acquire greater visibility and transparency across their supplier network in order to correctly identify the origins and suppliers of products, and in time, might impose financial penalties for incorrect reporting.⁴⁷

While these measures may seem onerous, they could encourage companies to monitor their supply network better or move their production to countries with stringent climate policies and encourage countries to strengthen their regulatory frameworks in order to attract global businesses. And by doing so, such initiatives can offer a range of possibilities, from generating employment to fuelling economic growth.

On a broader scale, they can create a world capable of sustainable growth while contributing to decarbonisation. But funding them requires huge capital investment. By some estimates, creating the physical assets needed for the decarbonisation transition alone will require capital expenditure of over US$9 trillion annually through 2050.⁴⁸

FINANCING SUSTAINABLE BUSINESS PRACTICES

Finance, in other words, is at the heart of a sustainable transition – and in this regard, banks like ANZ play a key role by funding and facilitating social and environmental outcomes. This includes offering a variety of sustainable financing options that incentivise borrowers to meet targets ranging from reducing Scope 1, 2 and 3 emissions to responsible farming and sourcing practices. For example, Cesbert notes, ANZ has joined hands with Pollination, a climate change investment and advisory firm, in seeking to deliver solutions that will help institutional clients address biodiversity-related issues and successfully decarbonise their operations.⁴⁹

“Sustainability-linked products are an effective way to influence best practices across the supply chain. And it’s not just about the environment – targets can also be linked to various other ESG metrics.”

David Simmons – Executive Director, Sustainable Finance, ANZ

Those metrics go beyond ensuring compliance, according to Nancy Wang, Director of Sustainable Finance, ANZ. The purpose of sustainability-linked products is to incentivise companies to go beyond business-as-usual practices and reach for ambitious sustainability performance targets that are material to their core business and aligned with strategy. Enhanced due diligence on the company’s ESG credentials performed by bankers with expertise in sustainable finance and/or independent third parties also assess whether the labelled product is fit for the customer. Furthermore, the Asia Pacific Loan Market Association’s Sustainability Linked Loan Principles set out voluntary market standards which have evolved as the market has developed, notes Wang.

This is in addition to the general due diligence performed by the bank to check that a company is not in business with a sanctioned entity, does not use raw materials sourced using forced labour, follows fair and equitable hiring practices, and, in markets like Australia and the UK, adheres to the requirements of the Modern Slavery Act.

ESG initiatives adopted by companies

Lenders play a key role here by conducting rigorous assessments to gauge the performance of current and potential borrowers on a range of environmental and social metrics.

“Assessing a company’s policies such as its supply chain code of conduct and labour practices is part of the standard customer suitability assessments we undertake for all Sustainable Finance customers to determine whether we are serving companies with the right track record,” says Kate Cheeseman, Associate Director of Sustainable Finance, ANZ.

These checks and balances are becoming more important as awareness grows about the magnitude of the challenge at hand.

“Given the increasing focus on ESG and the wave of global regulations surrounding those factors, sustainability-linked issuances – products able to incorporate both environmental and social targets – must demonstrate genuine ambition, particularly as the issues we are trying to tackle become more urgent."

David Simmons – Executive Director, Sustainable Finance, ANZ

Additionally, much more attention is being paid to how raw materials and feedstock are sourced, as well as issues like sustainable forestry and agriculture, and nature-related risks and opportunities, Wang adds.

“We are seeing increasing diversity in ESG metrics including those focused on sustainable supply chains, supported by both sustainability-linked and use-of-proceeds loans and bonds that are available in the market.”

Nancy Wang – Director, Sustainable Finance Portfolio, ANZ

The example of Nestlé is instructive in driving sustainable supply chain finance. In 2021, ANZ provided a facility that Nestlé could use to pay its suppliers affiliated with groups like the Rainforest Alliance/UTZ and Fairtrade for its Nespresso Coffee line – with the margin linked to the suppliers’ certification status. Suppliers that meet certification requirements receive the margin benefit and lose it if their rating slips. By using a variety of financial incentives, ANZ supported Nestlé to build a more sustainable supply chain across geographies.

And, as Wang notes, green issuances continued to dominate the sustainable debt market in 2023, as per data from the Climate Bonds Initiative, with deals supporting low-carbon energy projects exceeding those originated by fossil-fuel companies. Furthermore, H1 2023 was reported to be the most promising half-year period for sustainability-linked bonds fully aligned to Sustainability-Linked Bond (SLB) targets, which cover all material sources of emissions.

And while, as we have noted, huge amounts of capital are required to finance the transition, many banks have stepped up to deliver some of what is required. ANZ, for instance, has committed AU$100 billion by the end of 2030 in social and environmental outcomes through customer activities and direct investments by the bank.⁵⁰ By some estimates, the size of the global sustainable supply chain finance market could eventually be as much as US$660 billion and is growing at a rate of 15–20% annually.⁵¹

Admittedly, ensuring these funds are disbursed in a responsible manner and to deserving borrowers is a challenging undertaking, not least because standards and regulatory frameworks can differ across markets and geographies. However, large banks are typically well-equipped to deal with this, thanks to their international footprint complemented by teams of experts on the ground who possess an in-depth understanding of, and access to local markets, and who conduct thorough due diligence before financing any company or project.

New energy finance issuance

“Our team is composed of bankers and sustainability specialists from a range of backgrounds, and the depth and breadth of insight they provide informs ongoing product innovations in sustainable supply chain finance. Their due diligence also helps grow our understanding of the practices of our clients, as well as that of our partners and suppliers down the value chain.”

Nancy Wang – Director, Sustainable Finance Portfolio, ANZ

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