The RBA just put down a marker on climate change - and it's something all business should heed

Peter Parks/AFP/Getty Images

The last time the RBA became concerned about financial stability, it and its fellow regulators clamped down on what they deemed “speculative excess” in the housing market.

Though the governor of the Reserve Bank may debate what’s caused the house price falls we’re seeing across the country the reality is they had their genesis in the regulatory shifts which changed the lending paradigm and tightened credit in Australia.

It is with this history of concern and action that Guy Debelle, RBA deputy governor, delivered a speech in Sydney recently titled “Climate Change and the Economy” where he used the phrase “financial stability” 10 times.

Debelle noted that “the implications of climate change for financial stability…have been very eloquently discussed by Geoff Summerhayes (APRA) and John Price (ASIC) including at this forum over the past two years”.

That means that 3 of the 4 members of Australia’s council of financial regulators are now actively telling business owners and managers – and through them the boards of Australian businesses – that they need to start paying more attention to the financial risks of climate change.

For business, including financial institutions, that’s important because, as Oliver Wyman noted in a recent report “Climate Change, Managing Financial Risk”:

“The impact of climate change will prompt substantial structural adjustments to the global economy. Several sectors, such as coal and steel, are expected to experience significant disruption, while others such as renewables, carbon capture, and adaptation technologies are likely to benefit. Such fundamental changes will inevitably impact the balance sheet and the operations of banks, leading to both risks and opportunities. While mortgage portfolios in coastal areas may be exposed to the physical impact of climate change through rising sea levels and flooding, massive amounts of capital and new financial products will be required to fund the transition and finance climate resilience, creating demand for bank services. Meanwhile, regulators are beginning to act, and investors, clients, and civil society are looking for actions, mitigation, adaptation, and transparency on the issue.”

There is a lot to unpack there and clearly it’s about how financial institutions need to manage their risks – financial and otherwise.

The Reserve Bank’s Guy Debelle reiterates a point that APRA’s Geoff Summerhayes made previously, noting, “the challenge governments, regulators and financial institutions face in responding to the wide-ranging impacts of climate change is to make sound decisions in the face of uncertainty about how these risks will play out.”

Make no mistake, this is not just about the management of our banks, insurance, and superannuation assets. This point is as critical to you and your business as it is to the financial institutions.

That’s because in many instances you are the very financial risks the regulators are telling these institutions to manage better. Your business loan and the terms on which it is set, your home loan mortgage and the LVR restriction or outright prohibition they may be applicable to some parts of the seaboard at some point, or your insurance contract and the premium it costs to insure your business continuity, your plant and equipment, yourself, or your house.

All of these every day transactions that businesses, consumers, and households transact and take for granted will now – at the urging of the RBA, ASIC, and APRA here in Australia and other regulators across the globe – be subject to a heightened risk assessment by financial institutions.

Banks and other financial institutions will adapt and that means we’ll see these organisation move further down the road of risk based pricing. Some sectors, industries and regions will be winners as Australia’s financial institutions innovate.

But equally it may become harder to access these products for some customers, indeed it may be outright impossible to access for some in time. And it means that inevitably the price of such products will rise.

But Debelle and his regulatory colleagues are betting the cost of the incremental changes made through time will be cheaper and make economic adjustment easier than a step change at some point in the future in response to the actuality of climate change.

In doing that, Debelle’s speech lays down a marker for expectations of how Australia’s financial institutions will manage climate change risk. And by saying that climate change is a “trend” not a “cycle” and that “the impact of a trend is ongoing, whereas a cycle is temporary”, Debelle is signalling increased regulatory scrutiny for Australia’s banks, insurance, and superannuation firms.

That’s something every business in the nation needs to take heed of and understand how the consequences will impact them in the long term.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.