Government acknowledges systemic climate risks in sovereign bonds case settlement

In a statement now published on the Treasury website, the federal government has acknowledged the Australian economy, industries, regions and communities face a “systemic risk” from climate change. 

It brings an end to a three-year legal saga around the disclosure of financial risks in sovereign bonds, put forward in 2020 by Kathleen O’Donnell, a retail investor in the bonds.

The then-23-year-old law student had commenced a class action against the government, alleging investors were being misled by the failure to disclose climate change risks in bond issue documents.

Per the judgment published on 13 October 2023, the case related to the “real, but until more recently, underacknowledged risks” that climate change poses to Australia’s financial position.

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It was alleged the Commonwealth published bonds information through statements, term sheets, information memoranda and a relevant website, yet failed to disclose information about the alleged physical risks and alleged transition risks of climate change and its costs. 

“The proceeding alleges that the existence of those risks mean that there was and is a real, rather than remote, risk that before the maturity dates of the exchange traded government bonds held by the applicant, there will be significantly increased Commonwealth budget deficits (by reason of reduced revenue and increased expenditure) relative to Australia’s annual GDP; and a significant increase in Commonwealth government borrowing, and accordingly a significant increase in government debt (relative to Australia’s annual GDP),” the judgment stated.

In the judgment, Justice Bernard Murphy also noted the consensus position of leading climate scientists around the world that global warming and climate change bring risks of more frequent and more intense bushfires, storm surges, coastal flooding, inland flooding, cyclones, droughts and other extreme weather events. 

Murphy said it seems likely such events will “give rise to a huge drain on Commonwealth resources and on the tax base over a very lengthy period, perhaps forever, and therefore also weigh on forecasts in relation to the Commonwealth’s financial and economic position”.

The proceeding sought a declaration that the government engaged in misleading or deceptive conduct, but not damages. 

The government agreed, under the proposed settlement, to make a public statement regarding the systemic risk climate change poses to Australia’s financial and economic position.

Published on 16 October 2023, the Treasury statement acknowledged that “achieving Australia’s emissions reduction commitments and realising the opportunities that accompany the transition will require significant investment by governments and the private sector”.

It noted how uncertainty around the magnitude and timing of the physical impacts of climate change and the global net zero transition “translates to uncertainty about the fiscal impacts of climate change”.

As a consequence, “there is uncertainty about whether the fiscal impacts of climate change may affect (if at all) the value of Commonwealth Government Securities (also known as Australian Government Bonds or AGBs) and, in turn, eAGBs.”

“The economic and climatic changes brought about by climate change will have fiscal impacts. For example, the new industries and jobs emerging from the net zero transformation will impact the structure of the economy and, in turn, the tax base. 

“Extreme weather events are also expected to occur with increased severity and frequency, which will increase demand for disaster relief payments and infrastructure repairs,” it stated.

The government also highlighted how its 2023–24 budget continues this practice by transparently reporting $4.6 billion in new climate‑related expenditure, and how it is developing a package of sustainable finance reforms, including the establishment of a sovereign green bonds program and regulatory reforms, to increase the transparency and credibility of Australia’s growing sustainable finance market.

“The government’s intention is that these reforms will assist investors to align their investment decisions with net zero emissions targets and increase the flow of capital towards new opportunities that support Australia’s net zero pathway,” it added.