Why Australia is a Prime Destination for Sustainable Investment Amid Global Uncertainty

Sustainable investing, which drives the shift to a low-carbon, resource-efficient and inclusive economy, is facing mounting economic and political pressures. From economic headwinds and scepticism around green investments to the potential rollback of key US policies such as the Inflation Reduction Act (IRA), these challenges are testing the resilience of this critical investment strategy. 

Amid these challenges, Australia is emerging as a competitive destination for sustainable investment. With a supportive policy environment and abundant resources, it is poised to attract a share of the estimated A$123bn (US$80bn) in clean technology investment opportunities¹ diverted from the US. Beyond clean technologies, Australia is also drawing growing interest from investors in adjacent sectors, such as critical minerals, sustainable agriculture, and other industries essential to the global transition to a sustainable economy. 

In this article, we examine the evolution of sustainable investing, the challenges it faces in a volatile economic and political landscape, and the opportunities it presents for savvy investors. We highlight why Australia, with its strong sustainability credentials and supportive policies, offers a compelling case for investors to look Down Under as a stable and attractive destination for capital in a transitioning global economy. 

The Evolution of Sustainable Investing 

Between 2012 and 2022, sustainable investment assets under management doubled from A$20.9 trillion (US$13.6 trillion) to A$46.6 trillion (US$30.3 trillion)². This remarkable growth was fuelled by low interest rates, reduced input costs, and an increasingly favourable political and regulatory environment in certain regions (e.g., in 2020, EU Green Deal was approved). It was also driven by early optimism fuelled by the promise of sustainability to deliver both financial returns and global impact. 

Since 2022, however, market conditions have shifted significantly, serving as a reminder that sustainable investing is not without its complexities, requiring strategic adaptation to evolving realities. A rapid increase in interest rates, growing scepticism about sustainable investing, and global uncertainties. As signalled at COP29, held against the backdrop of these changes, the coming years will test the resilience of sustainable investing and its role in shaping the pace of the global transition to a low carbon economy.  

Finding Opportunities amongst the Challenges 

While current market conditions pose challenges, it also creates opportunities for investors to reimagine their investment strategies, capitalise on emerging trends and drive growth in an evolving sustainable economy: 

1. Balancing short-term performance with long-term growth under global economic pressures

Recent underperformance in some sustainable investments, particularly renewable energy (e.g., solar, wind) projects, has been primarily driven by two primary factors: macroeconomic pressures (e.g. rising interest rates and material costs) and structural issues (e.g. post-boom valuation corrections and underexposure to high-growth sectors). 

For example, sustainable US equity funds underperformed the S&P 500 by 5% in 2023³, partly due to their limited exposure in recent years to better performing sectors like technology. Additionally, during the era of cheap and abundant capital, some investors may have potentially paid a premium for these assets given the highly competitive nature of these deal processes. 

This underperformance is evident in the decline of median EV/Revenue multiples for green energy companies, which dropped from 6.4x–12.7x between 2020 and 2022 to 5.4x in Q4 2023, reflecting valuation corrections in the sector (see Figure 1). In other words, the hype phase of sustainable investing has given way to the inevitable harsh realities of commercial returns, even as the overall market (of decarbonisation, technologies, and finance) grows in structure, volume, and regulation.

Surce: Finerva, “Green Energy & Renewables: 2024 Valuation Multiples⁴” 

Despite these challenges, the momentum behind sustainable investing remains strong, underscored by significant progress in the transition to a low carbon economy. For example, global EV sales are projected to reach 17 million in 2024, accounting for nearly one in five cars sold worldwide⁵. While headlines may focus on smaller-than-expected growth, these figures highlight the enduring demand for businesses that stand to benefit from the low carbon transition tailwinds. 

Investors who adopt a disciplined approach, focusing on high-quality assets with robust fundamentals, are more likely to succeed in this dynamic environment. By identifying ‘winners’ – companies well-positioned to capitalise on the medium-to long-term growth – Investors can navigate current market pressures while building resilience for the future.

2. Growing sustainable investment maturity despite a sceptical environment

In recent years, sustainable investing has grappled with scepticism, particularly in the US, where concerns about underperformance, greenwashing, and political polarisation around terms like “ESG” have created challenges⁶. These doubts often stem from inconsistent views of what sustainable investing entails and a lack of alignment on how it should be applied across sectors. 

However, the sustainable investment landscape is rapidly maturing. One key indicator of this maturity is the growing adoption of standardised definitions and taxonomies across jurisdictions. Frameworks such as the EU’s Sustainable Finance Taxonomy or Australia’s Sustainability Reporting Standards provide clearer benchmarks for identifying and assessing sustainable assets. These tools are enabling investors to navigate the complexities of sustainability with greater confidence, fostering more consistency and comparability across markets. 

This standardisation is unlocking opportunities in previously overlooked areas. As the field aligns more closely with these taxonomies, the scope of opportunities for investors continue to grow, driven by an ever-expanding range of businesses pivoting to solve the challenges of the global transition to a sustainable economy. These opportunities are no longer confined to traditional clean technologies; they now extend to sectors like sustainable infrastructure, green manufacturing, and even the decarbonisation of data centres and potential repurposing of gas pipelines to transport future facing fuels (e.g. green hydrogen). 

To capitalise on this growing range of opportunities, investors must adopt a more nuanced perspective. Recognising that many options exist in shades of grey rather than clear-cut categories, they need to focus on sustainability topics that are most material to the risk and return of their investments. With the support of standardised frameworks and the ongoing innovation within industries, investors are better positioned than ever to contribute meaningfully to the global transition while achieving their financial objectives. 

3. Reallocating capital to alternative destinations like Australia, with strong investment opportunities and sustainability credentials 

Recent COP29 discussions underscored the urgency of global climate action, showcasing major milestones such as a UN-led global carbon trading system, a $120 billion boost in World Bank climate lending⁷, and the Climate Investment Funds' $75 billion bond program⁸. While potential U.S. disengagement from the Paris Agreement raises concerns about a tipping point for sustainable investments, global momentum reamins strong. Countries like Australia are uniquely positioned to capitalise on redirected capital flows, leveraging their resources and innovation to accelerate the transition to a sustainable, low-carbon future.

Australia’s appeal as a sustainable investments destination is bolstered by its supportive policy framework, favorable regulatory environment, and abundant renewable resources. Key government initiatives, such as the A$22.7bn Future Made in Australia package⁹, A$10bn Capacity Investment Scheme¹⁰, and A$20bn Rewiring the Nation¹¹ initiative is fostering rapid expansion in renewables and emerging industries like green hydrogen. Legislative commitments to a 43% emissions reduction by 2030 and net-zero by 2050¹² provide regulatory clarity, while Australia’s abundant renewable resources—including critical minerals and plentiful solar, wind, and biomass energy—enhance its competitive advantage. As the Renewable Energy Institute highlights, Australia’s leadership in clean energy innovation makes it a critical player in the global shift to a sustainable future¹³. 

For investors, this is a pivotal moment to secure a competitive advantage in Australia’s expanding green economy. Early entrants stand to benefit from substantial government support, including co-investments, low-interest loans, and tax incentives, which enhance the economic feasibility of sustainable projects. Acting now allows investors to capitalise on relatively untapped markets, positioning themselves as leaders in the growing net-zero economy. 

Key Takeaways for Investors 

• Staying the course with sustainability: Don’t let short-term challenges obscure the long-term value of sustainable investments. By prioritising high-quality assets with strong fundamentals, investors can build resilience and capitalise on the long-term growth opportunities in sustainability. 
• Prioritise stability amid volatility: In today’s volatile markets, Australia stands out as a stable and reliable destination for sustainable investment. With clear net-zero commitments, abundant resources, and strong government support, it offers both short-term security and long-term growth potential. 
• Broaden horizons to find value: The sustainable economy is rapidly evolving, opening doors to emerging sectors like battery storage, green hydrogen, and sustainable aviation fuels. By expanding beyond traditional clean technologies and taking a long-term view, investors can unlock hidden value and capitalise on innovations driving the global transition to net zero. 

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References

1. https://www.netzeropolicylab.com/trump-retreat
2. https://www.gsi-alliance.org/global-sustainable-investment-review-finds-us30-trillion-invested-in-sustainable-assets/
3. https://www.barrons.com/articles/esg-fund-performance-2023-3d89618e
4. Green Energy & Renewables: 2024 Valuation Multiples | Finerva
5. Global EV Outlook 2024 – Analysis - IEA
6. The real impact of the ESG backlash
7. COP29 | MDBs to Boost Climate Finance
8. CIF’s $75 Billion Clean Energy Bond Program Launches on London Stock Exchange - ESG News
9. Investing in a Future Made in Australia | Budget 2024–25
10. https://archive.budget.gov.au/2023-24/index.htm
11. COP29 and Australia: Has the Labor Government Been Walking the Talk on Climate Action? - Australian Institute of International Affairs - Australian Institute of International Affairs
12. Australia Legislates Emissions Reduction Targets | Prime Minister of Australia
13. https://www.renewable-ei.org/en/activities/column/REupdate/20240605.php