Bear market realities will follow politics’ ESG moment

The biggest area of change the business community will need to navigate under Anthony Albanese will be in the area of climate policy, although exactly what this eventually might look like will depend on whether Labor can form a majority government, and how the votes in the Senate fall.

Labor took to the election a policy of reducing emissions by 43 per cent by 2030 on the way to achieving net zero by 2050, but many of the teal independents favour larger reductions. And the Greens, who may end up with the balance of power in the Senate, want Australia to hit net zero by 2035. Labor has a mandate for climate action, but how far it is willing to go, or will be pushed to go, remains to be seen.

But the business community has long called for higher emissions reduction targets, and many of our biggest companies have stronger, better articulated climate change plans than the country has.

Energy security and fairness

Further, most Australian companies are already living with the challenges and opportunities of climate change. Last week brought several powerful examples of both, from BHP outlining ambitious plans to grow its potash business as climate change exacerbates food security worries, to Boral revealing a profit hit of $30 million from the floods in NSW and Queensland, to Woodside receiving a stinging protest vote over its poorly articulated emissions reduction plan.

The corporate sector will rightly want to ensure any climate policy recognises we need an energy transition that delivers energy security and fairness. But most leaders will welcome more policy certainty as they contemplate the big investments required to cut their emissions and keep their shareholders on side.

Undoubtedly, there will be flashpoints between business and the Albanese government. The corporate sector’s eternal push for tax reform, for example, looks unlikely to go anywhere, with Labor unlikely to pick up The Australian Financial Review’s sensible idea for a post-election review of the tax system.

The threat of rising wages may be another area of debate, although it is worth noting business isn’t uniformly against wage growth; prominent chief executive Shayne Elliott of ANZ and Rob Scott of Wesfarmers are among the leaders who have indicated they want to ensure staff can deal with cost of living pressures.

Perhaps the more interesting question is how the corporate sector and the Albanese government balance the rising call for action on ESG issues with a dramatically different economic and market regime.

Difficult balancing act

The prominence of ESG grew most strongly in the final years of an epic bull market that started after the GFC and was characterised by ultra-low interest rates, rising asset prices and economic stability. While the urgency of climate change and gender equality is undeniable, a supportive market and economic backdrop has made it easier for companies to prioritise these issues and meet the costs that come with them.

As we enter a world marked by rising inflation, rising interest rates and heightened geopolitical tensions, pressure on financial returns, asset prices and economic growth will rise. Will the focus on ESG matters shift?

Let’s hope not – the planet simply cannot afford to slow an already urgent energy transition and gender equality should not be “nice to have” in 2022.

But there’s no question that, like corporate Australia, Albanese faces an incredibly difficult balancing act over the next three years. By the end of this year, inflation will likely be running at 6 per cent and the cash rate could be more than three times higher than it is now, with energy security and labour shortages to be with us throughout Labor’s term.

A huge test looms for a new prime minister facing expectations from all quarters.