The likelihood of “significant” divestment out of Australia because of climate risks is increasing, according to the Reserve Bank of Australia (RBA).
In anticipation of the COP26 summit in Glasgow later this month, the RBA deputy governor, Guy Debelle, said at a CFA Societies conference, that climate change was a “first-order risk” for the Australian financial system.
“In Australia, over recent years, climate risks have increasingly entered the discussion with foreign investors. It almost invariably comes up in conversations I have with asset managers,” he said.
Debelle said divestment risk was being actively monitored by the RBA but that it had not manifested in the economy, besides in a few small cases such as Sweden’s Riksbank decision to halt Queensland and Western Australia bond investment.
While climate events were unpredictable whose risks were difficult to articulate, they were increasing in frequency and, noting Cyclone Yasi in 2011 as an example, had tangible impacts on Australia’s macro-economic environment.
For the transition to be funded effectively, Debelle said, Australia would need to implement investment taxonomies that were consistent with the transition to a net zero economy.
“At the same time, it will be highly desirable to have a taxonomy that is consistent with those developed elsewhere in the world that investors find straightforward to use,” he said.
Debelle explained the Climate Vulnerability Assessment, a partnership led by the Australian Prudential Regulation Authority (APRA) with support from the banking industry and the RBA, which aimed to get a better understanding of climate risks.
While there were no implications for banks to hold capital in addressing these risks, the results of the assessment suggested “a small share of housing in regions most exposed to extreme weather could experience price falls”.
“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,” Debelle said.
He said investors were already adjusting their portfolios in response to climate risks while governments around the world were implementing net zero policies; both of which were increasing the cost of Australia’s emissions-intensive activities.
“Irrespective of whether we think these adjustments are appropriate or fair, they are happening, and we need to take account of that,” he said.