RBA warns of climate finance risks

Financial regulators are warning the economy risks missing out on foreign investment and being penalised by other countries unless Australia sets climate change rules that are similar to those overseas.

Europe is leading the charge in setting sustainable finance rules for banks and fund managers, which will determine if they can lend money and invest in certain industries and countries including Australia.

The local Council of Financial Regulators (CFR) said the international moves would have implications for “investment flows” and it is also considering how Australia’s banks, insurers and superannuation funds can manage the transition to a low-carbon world.

“CFR agencies will consider these developments and potential implications for Australia, including the risk that a dominant taxonomy emerges that is not well suited to Australia’s need to finance the transition to lower carbon emissions,” the council said this week after its quarterly meeting last Friday.

Local regulators are also anxious about offshore moves to mandate market disclosures for listed companies on climate change, “which could undermine the ability of markets to price climate-related risks accurately” in Australia, the council said.

The statement was signed off by Reserve Bank of Australia deputy governor Guy Debelle, who chairs the council’s working group on Financial Implications of Climate Change.

Treasurer Josh Frydenberg warned last week that if offshore investors assumed Australia was not transitioning in line with the rest of the world on reducing emissions, foreign capital would be harder and more expensive to source for the government, banks, home loans, small business and infrastructure projects.

The Coalition government is divided over whether to embrace a net-zero emissions target by 2050, ahead of the global climate change summit in Glasgow starting on October 31.

In July, large foreign investment funds warned they could blacklist Australia and cut billions of dollars of investments in the country if the government fails to commit to a net-zero 2050 greenhouse gas emissions target.

RBA governor Philip Lowe said in June foreign investors and regulators were very frequently asking “what is Australian business doing to decarbonise?“.

”Many international investors are very focused on this issue,” Dr Lowe said. “Increasingly, overseas investors are asking about the carbon content of production and that’s a trend that is only going to continue.“

Local banks are also working with regulators to measure and understand climate risks to financial institutions and the broader economy.

The five largest banks are undertaking a “climate vulnerability assessment” on their loan portfolios, to model the potential future impact of climate change across different geographies and industries.

The scenario planning not only includes physical risks from rising sea levels, fires and floods but also the financial risks to banks and their customers from the transition to a lower-carbon world.

The program led by the Australian Prudential Regulation Authority (APRA) in effect covers the entire economy because of the reach of the big banks – ANZ, Commonwealth Bank of Australia, National Australia Bank, Westpac, as well as Macquarie.

In a separate research paper, the RBA in September warned of “significant uncertainty” for Australian banks about the risks to balance sheets from climate change.

“This is because of the uncertainty about how climate change will alter future weather patterns, how policies will change globally and how economies adapt.

“A small share of housing in regions most exposed to extreme weather could experience price falls that might subsequently result in credit losses, but the overall losses for the financial system are likely manageable.

“Banks are also exposed to transition risks from their lending to emissions-intensive industries, but their portfolios appear to be less emissions-intensive than the economy as a whole.”

The RBA also said the expected long-term collapse in coal shipments as Australia’s biggest customers pivot to net zero emissions would impose only a relatively modest hit on economic growth.

The blow could be softened if Australia replaced coal exports with renewable energy exports.

APRA is developing guidance on governance, risk management and vulnerability assessments for the largest financial institutions.

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