Climate change could destabilise financial system

Australia's carbon intensive economy, lack of policy clarity, and global capital market reliance could be exacerbating the effects of climate change on its financial system, according to a climate risk report.

The discussion paper, ‘Australia's Financial System and Climate Risk' by The Climate Institute, said the country's financial system could be destabilised by both direct climate change impacts, and secondary effects such as a slump in demand for carbon-intensive exports.

The Climate Institute's chief executive, John Connor, said poor policy signalling, delayed action, and mis-reading by markets could lead to a messy transition that threatens the financial system stability.

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The paper said risks to stability referred to disruptions that can spread within the financial system and affect the broader "real" economy.

"The question is whether the entire financial system can adapt in an orderly way to climate change and related shifts in policy, society, and technology," Connor said.

The Climate Institute said over the past two years particularly, large, long-term investors are have been increasingly incorporating climate risk as a material factor in their strategies.

"With major economies like the US and China putting forward initial long-term emissions reduction targets and accelerating climate action ahead of the Paris climate talks at the end of this year, the direction of travel is clear," Connor said.

"Nations and mainstream economic institutions and organisations now recognise that the global economy must be zero carbon before the end of this century."

The paper said elements of our financial system exposed to the effects of climate risk were identified as:

  • banking
  • insurance
  • superannuation asset allocation and funds management
  • resources Sector
  • sovereign debt and capital markets; and
  • infrastructure

"However we do know climate impacts are already costing us, and those costs will continue to grow. These are complex issues; it will take time and effort to work through them. This is why it's essential to begin looking at them now," Connor said.

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