The Reserve Bank has warned banks, insurers and other businesses to act now to manage the financial threats from global warming, with directors and trustees likely to face litigation risks if they don’t take “appropriate actions”.
In a broad-ranging speech on Wednesday, the central bank’s head of domestic markets, Jonathan Kearns, said the climate crisis was a “significant issue” for the economy and society. Effects would be “more severe” if actions were delayed.
For financial markets, the RBA’s main focus, the challenges range from immediate and chronic risks from the intensification of extreme weather, to the legal liabilities for those in charge of companies.
Kearns said the appetite for Australia’s fossil fuel exports was also likely to diminish, a so-called “transition risk” the RBA is now taking into account for potential future economic fallout.
Aside from the physical risk - both acute and chronic - there is the transition risk from climate change, the RBA says. That's being stuck in industries and technologies the sun should be setting on. The bank plots this difference for coal between current and net-zero policies. pic.twitter.com/kP2nindyTy
— Peter Hannam (@p_hannam) August 23, 2022
The RBA was concerned asset prices would probably become more volatile, affecting their value as security for loans. That, in turn, would require banks to reassess their books.
Households and businesses may also have their ability to repay debt reduced.
The RBA in its look at climate risks also has a stab about how loan-to-value ratios might be affected by climate change. As houses become harder to insure in a warming world, banks are going to have to reassess their lending books. pic.twitter.com/pZzrnTKTdm
— Peter Hannam (@p_hannam) August 24, 2022
The RBA and other members of the Council of Financial Regulators – Australian Prudential Regulation Authority, Australian Securities and Investments Commission and Treasury – have been working on updated disclosure rules since 2017.
While noting uncertainties remain about the scale and location of climate perils, Kearns said business, directors or trustees were increasingly exposed to liability risk “if they do not sufficiently respond to climate change”.
“This risk exists not only when they choose not to take appropriate actions but also if they are not informed to take appropriate actions,” he said.
Apra has already been working with the country’s five biggest banks to develop climate vulnerability assessments to account for “anticipated physical and transition risks through to 2050”.
These assessments are based on two scenarios developed by the Network of Central Banks and Supervisors for Greening of the Financial System that has been advising up to 100 central banks and similar agencies around the world. One is for a delayed and then rapid reduction in emissions, and the other the continuation of current global policies that are insufficient to meet the Paris Climate Agreement targets.
The regulators were also working to develop disclosures by companies that would be both “high quality” and comparable with other nations to help investors understand the risks at play.
The International Sustainability Standards Board was aiming to finish “key decisions” by the end of 2022, Kearns said.
The third area of work was to provide “scientifically based definitions for what could be considered as ‘green’ or ‘sustainable’” finance. Asic on Tuesday listed as a priority a crackdown on “greenwashing” by companies that exaggerated their emission cuts or other environmental efforts.
Without a taxonomy of consistent definitions, Australia could find it harder to attract investment, Kearns said. “For example, the EU taxonomy may label LNG as not being a green investment unless it meets stringent requirements that are not applied in Australia,” he said. “[H]owever, in the near-term, increased use of LNG in Australia may assist a transition away from coal while renewables infrastructure is developed.”
Head of the ARC Centre of Excellence for Climate Extremes, Andy Pitman, also a member of the Australian Sustainable Finance Institute’s taxonomy project, said it was “valuable” that the RBA was addressing climate risks.
“There needs to be active dialogue between groups like the RBA and those who develop the [climate] models that provide the information around future risks,” Pitman said.
The Australian Banking Association said banks recognised climate change represented “a first-order risk to the Australian economy, the financial system and investors”.
“Banks support the Paris Agreement and its objective to take into account the needs of a just transition while achieving a net zero emissions economy and resilient Australia,” a spokesperson said.
“As part of this work, banks have worked with APRA over the last 18 months to assess climate vulnerability across their lending banks, including their mortgage portfolio. We look forward APRA publishing the outcome of this work later this year.”
