The likelihood of significant divestment from Australia because of climate risk is rising, the Reserve Bank of Australia says.
Climate is a key concern for foreign investors and the likelihood it will influence investor appetite for Australian bonds and equities is increasing, according to the RBA.
In a speech on Thursday, deputy governor Guy Debelle said that climate is a common topic of discussion with foreign investors, with a marked increase over the last few years.
And while, to date, these discussions have “not led” to any obvious change in investor appetite, this is likely to change shortly.
“One of these is when the Riksbank discontinued its investment in Queensland and WA state government paper a few years ago. There is a risk we will see more of these divestment decisions sooner rather than later,” Dr Debelle warned.
“In our liaison conversations with many Australian companies, they also tell us that climate comes up constantly in their discussions with their equity investors and bondholders,” he added.
According to Dr Debelle, divestments beg the question as to how the transition to a low-carbon economy will be financed, particularly for governments dealing with the costs of climate change itself.
These include the transition risks posed by the shift away from coal and physical risks such as a direct loss from a climate event.
“Governments in other jurisdictions are implementing net zero policies. Both of these are effectively increasing the cost of emissions-intensive activities in Australia.
“So, irrespective of whether we think these adjustments are appropriate or fair, they are happening, and we need to take account of that. The material risk is that these forces are going to intensify from here,” Dr Debelle said.
He termed climate change a “first-order risk for the financial system”, with a broad-ranging impact on Australia.
“Most Australian financial institutions now recognise climate as a risk. The assessment of climate risks has evolved considerably over the past five years, but there remains considerable scope for further improvement,” Dr Debelle said.
However, the challenges aren’t inconsequential, with many owed to the uncertainties involved in making assumptions about a possible future and the lack of historical data.
“These challenges make the case for public policy to provide regulatory guidance about what standards of risk management should look like and to coordinate outcomes in areas such as disclosure,” Dr Debelle said.
Currently in Australia, 49 of the ASX top 200 companies have a net zero policy, while 80 make climate disclosures under TCFD on a voluntary basis.
“These Australian companies have moved beyond the question of whether to disclose to the question of what to disclose,” Dr Debelle acknowledged.
“Whether disclosures should be mandatory is a question for government. Disclosures are necessary and important, but their accuracy and intent is even more so,” he cautioned.
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