20 May 2021
In this episode of the PwC Federal Budget Podcast, we look at what Australia would gain from greater investment into ESG - from economic growth, through job creation, to social uplift - and whether Australian business is at risk of being left behind.
Laura Jayes: Hello, I'm Laura Jayes and welcome to the PwC Federal Budget podcast. Environmental, social and governance strategies have the power to accelerate Australia's economy towards a more sustainable future for our people and planet. What is good for society is good for the economy.
I caught up with PwC’s Social Impact leader and partner Rosalie Wilkie and environmental infrastructure partner Chris McLean to discuss what Australia would gain from greater investment into ESG, from economic growth through job creation to social uplift, and whether the budget missed the mark.
So is Australian business at risk of being left behind? Let's find out.
Laura Jayes: Well, the budget 2021 is done and dusted for this year. Chris, let me start with you. When it comes to energy and the environment, what was in the budget?
Chris McLean: There were three billion dollars of announcements, but in the context of this budget, that was not significant, pretty immaterial when you compare it to the overall spend for infrastructure, which is around 110, 120 billion dollars.
At PwC we consider that there needs to be about 10 billion dollars a year spent in the next eight years on environmental infrastructure upgrades. Of that 10 billion dollars we're talking about, it doesn't look at other kinds of emissions that need to be reduced in the transport sector, for example, or the agricultural sector with our two biggest emissions industries after energy.
Laura Jayes: Rosalie, what has the Budget done well, when it comes to ESG and what are the opportunities moving forward?
Rosalie Wilkie: Look, I think ESG really means picking up what's important or what's material to your stakeholders. And I think the budget has done that. It's picked up obviously a lot about health and a lot about jobs. It's also really picked up on what COVID’s done, and that's accelerated digital. And the budget has built on many elements of this. We've seen a lot around automation, around deregulation to allow that digital piece to also be reflected in the budget. And, Chris, you might have some more views on that.
Chris McLean: Oh, look, there's been some good announcements around support for hydrogen and carbon capture. And there's a fair bit of support also for, you know, protecting the oceans and organic waste. So there has been a splattering of support around energy and environment that is in the right direction. I think the opportunity really is around regulatory reform to support greater private sector participation in the market.
Laura Jayes: Rather than waiting to see how COVID-19 dictates our life, how can we dictate it through ESG?
Chris McLean: I think it's actually forced businesses within energy and environment to really reframe the way that they approach the employees and their stakeholders, digital adoption and dealing with things like power outages digitally and remotely and working offline has definitely been something that they've promoted and been accelerated. So that's a good thing because that drives down the cost of energy overall.
So COVID has actually presented some good challenges to the business model and brought forward a lot of things that probably would not have changed in the utility sector in particular. So there's that part of it. The other part is what it does present for Australia is really it's challenged the way that countries interact with each other and as a whole movement towards self sustainability. And that's important not just from an energy security perspective and where we get it from who we're dependent upon, there's a bigger defence element to that as well, but also around waste.
So we've been looking at this for a few years now around what happens to our waste when we use it. We can't export it. We've got to deal with it in Australia. And I think what COVID has done is, you know, when you can't when you're not thinking so internationally all the time, you have to you know, you're forced to look inward. And it's actually brought forward a lot of that thinking around, you know, we've got to be responsible for our own waste. We've got to be responsible for our own emissions. We've got to be responsible for our environment. And so I think in a kind of macro psychological sense, it's actually helped a lot. It does provide a pretty good basis for us to move forward.
Laura Jayes: Rosalie, interestingly, on the social development side, for a liberal government and a liberal budget, there was a little bit more to get your teeth into.
Rosalie Wilkie: There really was. And I guess any budget is big on the S or the societal. This budget really recognised many vulnerable members of the community, everyone from aged care, disability, women, domestic violence victims, early childhood, young people of mental health. So there really was a lot. The other piece I think this government has started to do for the first time was really recognise the growing wealth inequality, and we saw housing assistance for young and first home buyers, but also single parent families, which I think is a real recognition towards what property ownership is doing in this country when it comes to wealth inequality.
Laura Jayes: So on the social housing side, Rosalie, we've seen not only the government recognise the importance of that, but Labor also putting it on the table in an election year.
Rosalie Wilkie: Yeah, I think I think that's really big news and a big differentiator. Certainly, the Liberal government is really trying to recognise home ownership, but of course, for many members of the community, really getting to that ownership won't happen until there is a more affordable and social housing package in between.
Laura Jayes: Chris, energy is something that has probably dogged governments for about two decades now, if not longer. The political conversation is about net zero emissions by 2050. Perhaps the budget wasn't the place for the government to announce that they were going to have this goal. But when you see what other countries are doing, comparable nations, do you think Australia is going to make that commitment?
Chris McLean: They came awfully close, the language was very, very close, wasn't it, to a net zero commitment. But maybe they're saving that up for later. Look, I think in some respects you can say that we're falling behind because of that, but in others, Australia is leading the way. So we tend to be quite critical of the language we use, but in a lot of respects, we are advanced. You know, we've got the largest adoption of rooftop solar in the world. The states and territories have gone ahead and announced net zero commitments by 2050. We've got the largest batteries in the world here. You know, we are doing lots of good things. Would we have liked to have seen the commitment in the budget? Yes. Does it really matter? Probably not.
Laura Jayes: And Rosalie when you talk about the environment and these political imperatives and goals and the willingness of corporate Australia to meet what the government is not willing to set in stone, there's a big social aspect to that, isn't there?
Rosalie Wilkie: There absolutely is a big social aspect, and, you know, I think from a corporate perspective, having a science based target or a net zero is something which is easy and people can move to measure it and know where they need to get to. When you get to some more tricky areas within the social arena, and that can be everything from mental health to other vulnerable members of the community, it's a little bit harder to measure and it's a little bit harder to work out where to go to, particularly on a corporate side, without working with many other people.
Laura Jayes: Where does that collaboration lie?
Rosalie Wilkie: Look, I think when you sort of speak to social issues, it's really everyone's issues and something like climate change is everyone's responsibility and everyone does have a role. But that being said, government does have a significant role is really core to it, particularly in funding and regulation certainty. We've seen a little bit of that in this budget.
I think the other piece I did see in this budget is lots of glimmers of hope, of collaboration and how people can work better together. For example, the resilience plan, states and governments and NGOs having to work together when we do have, ironically, disasters through potentially climate change coming together.
But there was also a lot of industry and government partnerships, such as the STEM scholarships, such as the hydrogen hubs and the carbon capture. So the more we can build on that, give industry certainty. And picking up on what you said, Chris, I think the government announcing net zero does actually give that certainty to business to go ahead. So it's sort of the federal government who likes to give business certainty, perhaps maybe miss the mark on some
Laura Jayes: Certainty and incentive?
Rosalie Wilkie: Correct, yes.
Laura Jayes: Chris, is there enough incentive in the Budget?
Chris McLean: It's really clear that they want the private sector to lead a lot of this because, you know, there's a technology roadmap that they've introduced which is really around the Government not committing to a technology, but letting the private sector work it out. Hydrogen is obviously the big bet that they've made. But again, when you look at the context of the overall Budget, it's not a huge bet for them. The incentives that we've had in the past that have really driven huge uptake in renewables have all dropped off and they're not there anymore. So, yeah, look where there is a gap for the incentives and Governments in election years. Roll them out.
Laura Jayes: Well, the Government is due to release its long term strategy ahead of the Glasgow UN climate summit. What are you hoping to see there and what do you think you will see in that plan?
Chris McLean: We would like to see some staging towards a 2050 plan. We think that they'll definitely be a net zero commitment before then. And that will be the formal commitment. But what we really need to see is the staging of progression toward 2050. There's a lot of years in between now and 2050. And what happened last time was, you know, we had a renewable energy target for 2020 and there was a lot of political uncertainty into 2020. And when that was resolved in around 2016/2017 we saw the largest spend in renewable energy investment on the electricity grid that has ever occurred. We saw one third of the total CapEx for the whole electricity grid get put onto it in three years.
So you think about that in 23 years before we had an amount of money spent and then we had another third of it go on in three years because of that incentive and the time limit that was imposed on it to meet a deadline, we can't have that happen again. Just results in an overspend on you know, we don't have the biggest labour force in Australia. We can't build things that quickly. And when things come on that quickly, you know, we have disruption and we had disruption and resulted in energy spikes, energy price spikes. We saw that happen last time. You know, that just can't happen again.
Laura Jayes: Rosalie, we often talk about the Budget for what's not in it. But in this Budget, we did see deficits for the next 10 years. In many ways, governments can never spend enough. But when it comes to requirements for social housing, more incentives. Was there anything that this Government missed that it shouldn't have?
Rosalie Wilkie: It could have gone harder on impact investing because that can really incentivize some innovation towards these big, hard social issues which have some long term impact and costs. I also do believe this Budget has forgotten a whole class of really important organisations, and that is the NGO sector. If you think about covid, that sector has probably been more impacted than most. If you think about the key elements of the budget, like aged care, like disability, like national resilience, NGOs have an absolute key role to play in all of those.
Laura Jayes: The Budget is often a statement of priorities from any Government, but we are moving towards an election, so there is opportunity ahead. What would you like to see?
Rosalie Wilkie: I’d definitely like to see more on social housing, but of course that's also got to be the vote winner. I think the other piece I'd like to see and really when you think about any ESG strategy is really covering the matters which are important to your stakeholders. So I think the Government has done a relatively good job of that. The question, of course, is what do we do now and how do we get there? And also how do we have a coherent strategy which fits all the bits together? Do it's not disconnected and we might have something here and a First Nations lines here and a veterans suicide here, but we haven't connected that up to the mental health or the housing links.
Laura Jayes: Chris, I think we've very well covered what were the missed opportunities in the Budget here, but again, they are a framing of priorities. We know how difficult it is for any government of any complexion to deal with climate change in a way that brings the public with you. So going forward, as we have Glasgow, the election has opportunities. What do you think the government should seize upon?
Chris McLean: Ironically, I think there is bipartisan support at the moment for investment in renewable energy and regional jobs. So to my mind, and I would think most people would consider that to be something that isn't controversial at the moment, providing a regulatory framework for investment in renewable energy and in the regions was a missed opportunity.
And when you consider where that goes in terms of the electricity supply chain that's into the grid and things like that, which is the biggest problem facing us at the moment and will result in a whole lot of capital expenditure and the creation of jobs in the regions. And we just haven't seen a coherent regulatory framework developed for that. We've seen New South Wales run ahead and set up their own renewable energy zones, which is kind of a way for them to address it. But, you know, Victoria, Queensland will they follow suit? It's really a mismatch along the eastern coast of Australia and creates a lot of uncertainty for where they could otherwise be certainty so that that is a really big missed opportunity. That being said, yes, they've got some big global summits coming up that will hopefully allow them to make those announcements. But, yeah, that was probably the biggest thing.
Another thing that they touched on is around the Patent Box Regime. And they said that they were going to review whether clean energy technology should be included within that. And it would seem pretty obvious, given renewable energy issues, that Australia is facing the development of technology and intellectual property in Australia, when we're leading the way, when it comes to rooftop solar and things like that, you know, we're in a good position to leverage that. And for the Patent Box Regime to not provide a tax incentive to clean energy technology seems a little bit strange and inconsistent.
Laura Jayes: Rosalie, we see the issue of climate change not a political issue at all in countries like the United Kingdom. Here, it's been something that's been seemingly insurmountable for two decades. Does that political division create a social divide?
Rosalie Wilkie: I think we're seeing a generational divide. I think we're seeing a regional divide. Now in saying that, I think it is creating divide, could we all rally around it together? I think once you do have some more certainty about 2050, everyone feels like they're heading in the right direction. I think we have the opportunity to break that. I also do think it could be a good opportunity for us in a reconciliation sense in that if we look at some of this through a first nation lens and yes, the Budget did start to recognize elements of First Nations Landcare through the resilience package in marine protection. How can we use that to shape our response to climate change? And what would that say about not only the rich culture and history that we have in Australia, but how it could even bring people together around what has been a politicized topic?
Laura Jayes: And Rosalie, what is the reward for getting ESG right?
Rosalie Wilkie: I think there's many rewards if we get ESG right, one of which, of course, is international credibility. We've got to think about the generations to come and that probably feels like the most obvious one. From a Government perspective, citizens all have an interest in ESG. They might be a little bit different for different people, but everyone's a member of society and everyone's impacted by climate change ultimately. So I think the rewards are immense if we get it right.
Laura Jayes: Rosalie, Chris, thank you.
Rosalie Wilkie: Thank you.
Laura Jayes: Thank you for listening to the 2021 PwC Federal Budget podcast, we hope you enjoyed our commentary. For additional in-depth analysis, head https://www.pwc.com.au/federal-budget.html, where you find articles and information about the 2021 federal budget and what it means for the economy, our society and you.
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Partner, Social Impact, PwC Australia
Tel: +61 417 021 993
Partner, Integrated Infrastructure, Environmental Transactions and Advisory, PwC Australia
Tel: +61 2 8266 1839