Tim Hext: States govern, feds pay and climate policy will be no different | Pendal Group
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Tim Hext: States govern, feds pay and climate policy will be no different

The federal government estimates $20 billion of funding is needed to hit net zero emissions by 2050. But it could be triple. TIM HEXT explains what that means for investors

You probably don’t spend much time pondering our federal and state government arrangements.

But after running the NSW debt program for ten years as a general manager of TCorp (NSW Treasury Corporation) — which involved regularly explaining the arrangements to offshore investors — I know state governments are more important than federal governments.

The only reason people gathered on the sheep paddocks of southern NSW in the first place was to discuss defence and foreign affairs.

Covid has demonstrated the importance of the states to the population. In day-to-day life, Australians now should well understand that premiers are more important than prime ministers.

Therefore it’s interesting to watch Prime Minister Morrison trying to reclaim ascendency in recent times, as we move towards a federal election due by May.

Whether it be vaccine rollouts, new infrastructure and now climate policy, the prime minister’s main job seems to be repackaging state initiatives as his own.

That’s nothing new. But it appears people are now onto it — and the spin doctors are having to work harder.

Why does this matter for investors?

Well, the states are like you and me. They have to either earn or borrow money to spend it. They must live within their means.

On the other hand, the federal government — via the Reserve bank — has the ability to create money. They don’t need to borrow or earn it.  The only constraint on federal spending is inflation.

Pendal Sustainable Australian Fixed Interest Fund

An Aussie bond fund that aims to outperform its benchmark while targeting environmental and social outcomes via a portion of its holdings.

Central bankers and economists used to push back on this. But after the past two years the cat is out of the bag.

Now the challenge is how to finance all the required climate initiatives.

Federal/state fiscal arrangements are complex — and in the relatively new area of climate policy thay are largely untested.

The federal government’s “Technology Investment Roadmap” estimates $20 billion of funding is needed to hit net zero emissions by 2050.

The cost may be closer to $60 billion based on estimates from countries that are less optimistic on the whole technology vibe.

I suspect much of this will come via guarantees of private projects rather than direct funding.

This is the European model and leads the world. Projects would need backing from the federal government, though, since state funding is already stretched.

Let’s hope federal and state governments can get back on the same page and work out a joint approach to climate policy.

States are already leading the execution, but the federal government will need to step up and do the heavy lifting on financing. (They already have the Australian Renewable Energy Agency and the Clean Energy Finance Corporation in place.)

Otherwise state credit ratings will deteriorate and the federal government will end up footing the bill anyway.

This is an increasing focus for us when assessing the credit ratings of semi governments and the positioning in our government bond portfolios.

We have also recently finished our wider ESG assessment of the states and will publish a piece on this in our upcoming Australian Quarterly.



About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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