New pathways to a lower carbon future

This means our largest emitting customers with good transition plans in place will have access to more finance. To assist further, we’re also developing an approach to finance our customers’ energy efficiency plans to help reduce their costs and demand. We’ll review this on a regular basis to ensure it continues to match our ambition.

“ANZ has a key role to play by directing our finance, services and advice to help our customers shift to low carbon business models.”

In addition to power generation and large-scale commercial property, we’ll align our lending to four new pathways and targets in oil and gas, aluminum, cement, and steel.

For our largest emitting business customers who have not improved their transition plans by 2025 - after significant engagement - we will look to reduce our exposure.

We’re on track to set 2030 targets for nine priority sectors – with six set as of today – aimed at ensuring at least 75 per cent of our portfolio emissions are on a net zero pathway by the end of 2024.

Critically:

• we’ll back our customers who have the right plans and commitments in place
• we’ve made good progress in conversations with 100 of our largest emitting business customers
• and pleasingly, they have said this engagement has been of enormous help to them in developing and financing their transition plans

At ANZ, we are continuing to improve our management of climate risk. We have refined our Risk Appetite Statements for our Group and Institutional business and have included climate risk in lending criteria documents for a number of our carbon intensive portfolios.

We have implemented new processes for assessing customer vulnerability to climate risks for certain high-risk sectors and, along with other major banks, we participated in Australian Prudential Regulation Authority’s (APRA) Climate Vulnerability Assessment.

In New Zealand we are preparing for the mandatory climate risk reporting required by 2024.

Climate risk is an emerging discipline compared with other traditional areas of risk – and our understanding of the impacts continues to evolve and mature.

With this in mind, in 2023 we will focus on:

• developing a data strategy to inform our approach to managing climate risk, including through conducting scenario analysis;
• ensuring we have a consistent approach to meet the evolving regulatory requirements across the 32 markets in which we operate; and
• extending our process to assess our customers’ vulnerability to climate risks to higher emitting sectors including resources and energy – this is currently being piloted in Project Finance.
  

New pathways

We were the first Australian bank to sign up to the Net-Zero Banking Alliance (NZBA) which commits us to aligning our lending portfolio with net zero emissions.

We commenced this work last year, setting emissions intensity targets for power generation and large-scale commercial real estate.

Meanwhile, our direct exposure to thermal coal mining has reduced by around 83 per cent since 2015; this is less than 0.02 per cent of Group exposure at default (EAD). We are on track to exit all direct lending to thermal coal mining well ahead of our 2030 target.

In determining these targets, we’ve undertaken extensive engagement with our customers which they have welcomed. They understand the market dynamic is changing and they want to work with us.

As our customers gradually switch to low carbon energy or bring online lower-emission production assets, we expect to see the emissions intensity of our portfolios decline towards our 2030 targets.

However, the transition is likely to be uneven and there will be challenges, in some sectors more than others.

The challenge was evident this year as the emissions intensity of our power generation portfolio increased due to short-term financing of some existing customers. They needed help to manage record high wholesale prices, requiring them to post collateral to margin accounts to cover these positions.

This does not translate to an increase in ‘real world’ emissions, as they are existing customers and assets.

Another challenge in this sector is to finance the new green energy infrastructure required while ensuring existing providers - that are investing in energy generation, storage and transmission - are supported.

We are also mindful of energy stability and security concerns. We remain committed to our power generation target and remain well below the International Energy Agency’s (IEA) 2050 pathway.

We’re already seeing strong progress in other sectors. Our property customers are one example where the emissions intensity of both office buildings and our shopping centre portfolios have decreased significantly.

Finally, a few months ago we met with key customers, regulators and peers in the UK and the European Union to discuss their responses to climate change.

Several themes came up frequently in our conversations, one of which was the importance of building internal capability and capacity to support the transition. We’re doing this by:

• building a deeper understanding of climate risk and opportunities through formal training;
• using external partnerships to bring in specialist expertise. An example is our partnership with Pollination; and
• setting remuneration incentives at the most senior levels of the organisation.

These discussions were an opportunity to get a pulse check and some guidance on what may come next here in Australia.

Environmental sustainability

ANZ has a key role to play by directing our finance, services and advice to help our customers shift to low-carbon business models. That’s at the heart of our Environmental Sustainability strategy.

That’s why we are now setting a $A100 billion by 2030 sustainable solutions target to further back our customers on the right path and speed up the process.

For example, we were a Lead Arranger and Joint Sustainability Coordinator for a five-year JPY10 billion sustainability-linked syndicated credit facility for Louis Dreyfus - a leading agri company with operations in more than 100 countries. The interest rate is linked to performance of environmental key performance indicators such as reductions in emissions and water usage.

We also provided a $A1.45 billion green loan for the Intellihub Group - a leading provider of metering infrastructure and data solutions. The funds are being used to rollout smart meters across Australia and New Zealand.

And were Lead Arranger, Bookrunner and Joint Sustainability Coordinator in a US$1.35 billion refinance for Brambles - a global supply chain logistics company specialising in reusable pallets, crates and containers. We delivered its inaugural sustainability-linked revolving credit facility which has key performance indicators relating to emissions reduction, sustainably certified timber and women in management roles.

These examples demonstrate the growth of our environmental sustainability capabilities right across our portfolio.

Aside from our customers, we are also engaging with government, regulators, shareholders, civil society, industry associations and, importantly, regional communities. These interactions ensure we are aware of issues concerning all parts of the community and is critical to a just transition.

Largest emitting business customers

All of this helps support the work we do with 100 of our largest emitting business customers who contribute approximately 147 million tonnes of direct (Scope 1) emissions from their Australian-based operations, around 30 per cent of Australia’s national total.

This year we had ongoing discussions with 99 customers on their transition plans and efforts to protect biodiversity. At end of September, 61 per cent of these customers have well developed or advanced transition plans, compared with 42 per cent last year.

When we engage with our customers, we consider three key elements that constitute a robust low carbon transition plan: governance, targets and disclosures.

For example, we have one customer initially assessed in 2021 at category ‘D’ level with no public plans in place. Over the past year their plans and actions have significantly evolved and they now have:

• a clear governance framework outlining senior management oversight;
• public targets and strategies up to 2030; and
• they published their first Task Force on Climate-Related Financial Disclosures (TCFD) report

As a result, this customer has moved to category ‘B’ - meaning we consider their transition plan to be ‘well developed’.

For customers with more work to do, we’ll continue to work with them on Paris-aligned plans. We’re hopeful most of these customers will continue to improve and develop their plans. Indeed, 29 of our largest emitting business customers have been upgraded since last financial year.

For the hopefully small number of customers that aren’t heading in the right direction by 2025 - ultimately, we may not be the right bank for them.

Biodiversity

Biodiversity has also become a new topic of engagement this year and is now included in our customer conversations.

For example, a large commodity customer is talking to us about how they’re identifying and understanding the material biodiversity issues in their operations. This includes deforestation management and an audit of wildlife sightings to ensure more robust measurement. This early work has been positive.

We are seeing increased customer awareness of, and improvements in the way they measure, the impacts of their business on nature. We expect progress to speed up in line with the establishment of the Task Force on Nature-related Financial Disclosures (TNFD), something we have both welcomed and joined.

While our priority has been engaging with our largest emitting business customers, we’re increasingly in conversation with a broad range of other customers about climate risks, trends and transition planning - many of these discussions are occurring at the customer’s instigation. We will also be focusing on financing corporate customers’ energy efficiency plans to reduce their energy costs and demand.

Customer support

Our policy is to support customers through the transition - backing their plans by providing finance for those reducing emissions. We have clear expectations, particularly for our customers in the energy sector.

We expect our existing energy customers’ plans to be net zero-aligned, public and specific by 2025.

However, we acknowledge some stakeholders have suggested ANZ immediately cease lending to companies in carbon-intensive sectors like energy. This approach may reduce ANZ’s exposures or ‘financed emissions’ however, it does not reduce emissions if the company receives funding from an alternate source.

We are also then precluded from actively supporting the development of their net zero-aligned transition plans. Ongoing engagement is our first preference however that is of course influenced by progress.

Success for us is ensuring discussion of climate change becomes part of everyday client engagement and that we have a deeper understanding of our customers transitions plans. Above all, we are conscious of getting the balance right.

Mark Whelan is Group Executive Institutional and Kevin Corbally is Chief Risk Officer at ANZ

ANZ’s targets, pathways and disclosures seek to demonstrate how we are aligning our lending to the Paris Agreement goals. Target setting is guided by the Partnership for Carbon Accounting Financials (PCAF) standard, consistent with international best practice in the finance sector. 

ANZ’s disclosures are TCFD-aligned - the latest Climate-related Financial Disclosures report and Financed Emissions Calculations Methodology are available on our website, along with the recent climate change roundtable investor presentation.