The risk of “significant divestment” from Australia’s institutions is only growing, the Reserve Bank of Australia (RBA) says, circling the need for businesses and governments to bolster their green credentials or risk losing out.
In a virtual address just days before the landmark COP26 climate conference in Glasgow, RBA Deputy Governor Guy Debelle on Thursday reiterated that climate change is a “first-order risk for the financial system”.
The physical risk of climate change to the Australian economy — like the chance of increasingly severe natural disasters influencing house prices — is a hot topic for financial regulators, Debelle said.
Beyond the RBA’s own modelling on how unchecked climate change could challenge mortgages across the map, Debelle pointed to the Climate Vulnerability Assessment (CVA) currently being undertaken by the Big Five banks and the Australian Prudential Regulation Authority.
The CVA will not only address the physical risks nestled in the banks’ loan portfolios, but the transitional risks — that is, the likelihood that changing consumer demand and foreign investment appetites might leave some assets worth far less than first predicted.
These concerns are a subject that “almost invariably comes up in conversations I have with asset managers,” Debelle said.
“In our liaison conversations with many Australian companies, they also tell us that climate comes up constantly in their discussions with their equity investors and bond holders.”
To prove its climate legitimacy to the world, Australian business community could focus on climate risk disclosures and introduce industry-wide ‘green’ investment standards to cut down on greenwashing, Debelle said.
Simply telling climate-concerned investors to jog on is hardly an option for Australia’s institutions, he added.
Widespread divestment would mean less flexibility for Australian companies to actually make their practices more sustainable.
Similarly, ensuring a just transition for workers in carbon-intensive industries will be much harder without continual investment.
With overseas firms and international governments charging ahead with emission reduction plans, the cost of inaction will limit the appeal of Australian investments, Debelle said.
“So, irrespective of whether we think these adjustments are appropriate or fair, they are happening and we need to take account of that.
“The material risk is that these forces are going to intensify from here.”
Those concerns are bubbling their way up to the highest levels of office, with Treasurer Josh Frydenberg late last month urging businesses not to get caught on the wrong side of the global shift to a net-zero emissions future.
But the federal government is yet to formally announce its own renewed climate targets, with just days to go before the COP26 conference.
With those targets still up in the air, and investors likely to baulk at Australian assets without further action, Debelle finished his speech on a positive note.
Australia has the opportunity to become a green energy exporter, he said, while pointing to the wealth of mineral resources needed for renewable technology.
“There are challenges ahead in managing the transition and in managing the financial risk,” he said.
“But with the risk comes a great potential for reward.”