New analysis: Australia’s financial system and climate risk Media Release

Jul 13, 2015 - 12:01am

Australia's financial system may be vulnerable to the effects of climate change, which could be exacerbated by our carbon-intensive economy, lack of policy clarity, and reliance on global capital markets, analysis released today by The Climate Institute shows.

The discussion paper, “Australia’s Financial System and Climate Risk”, identifies risks that the Australia’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. It examines general risks posed to all financial systems, and considers which risks could be particularly relevant to the Australian economy and financial system, through our broader economy, superannuation funds, mortgages, and our place in global capital markets.

It then puts a case for a comprehensive assessment by financial authorities, to ensure the system is resilient to climate-related shocks.

“We know that climate change is already affecting our economy, and that some companies and financial institutions are already waking up to the implications for their own businesses,” said John Connor, CEO of The Climate Institute.

“Yet many others are still forging ahead as though climate change, and the economic changes needed to deal with it, will have no impact at all on their plans.

“There’s a risk that poor policy signalling, delayed action, and mis-reading by markets could lead to a messy transition that threatens the stability of our financial system. This risk deserves closer examination by our policy makers and financial regulators.

“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.”

The past two years have seen unexpected shifts in many markets, such as slumping value of pure-play coal companies’ shares; declining resources demand from China; and plummeting costs of solar panels. It has also seen investors – particularly large, long-term investors - increasingly incorporating climate risk as a material factor in their strategies.

“More than 190 countries have committed to keeping warming to less than 2 degrees,” said Connor. “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. Nations and mainstream economic institutions and organisations now recognise that the global economy must be zero carbon before the end of this century.”

Governments of the world's biggest countries, including Australia, acknowledged that this risk deserves formal scrutiny when in April the G20 asked the global Financial Stability Board* (FSB) to consider stranded asset risks and the "carbon bubble". This is recognition that climate change has unique characteristics which can pose a threat to financial stability.

However the FSB work will not take account of every country’s particular characteristics. Financial authorities at a national level in many countries, such as the Bank of England, are taking concrete steps towards determining how they should guard against climate risk in their respective jurisdictions.

“The sub-prime bubble which led to the global financial crisis may offer insights, but there is no precedent for climate change in financial history which we can draw upon,” said Connor. “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.”

For more information
Susan Cavanagh | Media Manager, The Climate Institute | 02 8239 6299

Note to editors:

  • “Risks to financial system stability” broadly refers to disruptions that can spread within the financial system and affect the broader, “real” economy. It does not refer to disruptions affecting single industries without affecting the financial system, or to failures of individual financial institutions which are contained.

  • The FSB is a global forum of financial authorities created after the GFC to avoid future unforeseen threats to the global financial system. Its Australian members are Treasury and the Reserve Bank of Australia.


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