Jul 14, 2015 - 12:00pm
This article first appeared in Climate Spectator on 14 July, 2015.
Manager, Investment and Governance
Is the next financial crisis going to be caused by climate change? Is it even a good question? There are plenty of more pressing financial worries: China, Greece, and iron ore prices for starters. It’s human nature to focus on the biggest, nearest threat. Unfortunately, focusing on the short-term doesn’t make the long-term problems go away.
We were all reminded in 2008 that financial systems matter, a lot. At their most basic, they match creditors and debtors. If these conduits freeze up, there is no investment. Eventually the “real economy” suffers too. The damage can be immense.
We often hear about that financial crisis that “no-one saw it coming”, but some people did foresee aspects of it – they just thought they could escape unscathed. Chuck Prince, chief executive of Citigroup, at the time the world’s biggest bank, infamously answered questions about excessive lending
by saying in 2007
that “as long as the music is playing, you’ve got to get up and dance”. Just weeks later, credit markets began to panic. Within 18 months, many economies were in trouble and Citigroup had received a $45 billion government bailout and a $300 billion in loan guarantees to stop it collapsing and dragging down the global financial system with it.
Angel Gurria, OECD Secretary General,
in a 2013 speech that unlike the financial crises, we don’t have a “climate bailout” option up our sleeves. Yet, he added, “Interestingly, and despite all the press attention given to climate deniers, our understanding of the scale of the risk is much better developed than our understanding of the financial risks pre-crisis.”
Financial professionals are increasingly aware that climate change itself, and efforts to mitigate it, will impact their sector. Quite a few have taken note of the
“unburnable carbon” theory
, which simply points out that most of the world’s known fossil fuel reserves can’t be used if we’re to avoid extremely dangerous levels of pollution that would lead to more than 2 degrees of warming.
The need to avoid 2 degrees of warming has been
by virtually every government on earth, including Australia. Just last month the Australian Climate Roundtable, including the Business Council of Australia, the Australian Industry Group and the Electricity Suppliers’ Association of Australia,
declared their support
for this target highlighting the already growing climate costs and the long term costs of delayed or piecemeal responses.
The scale of the changes that have to take place to avert catastrophic global warming have got many foreign international authorities thinking seriously about this. The Bank of England
considers climate risk
at its monthly financial policy committee meetings; the International Energy Agency has mapped out how the world can meet its 2020 climate goals, and Norway’s massive sovereign wealth fund is
set to screen out
many thermal coal investments.
No such formal processes exist for Australia’s financial system. Despite submissions on climate risk from institutions like
Standard and Poor’s
, the recent Financial Systems Inquiry didn’t address climate risk in either its draft or final reports.
Yet our financial system is inextricably linked with our broader economy, which is heavily reliant on resource exports, agriculture and tourism. Many of us live in coastal areas, and about
seven per cent
of homes are already exposed to flood damage. We’re also a relatively small economy that relies upon global capital markets for a good portion of our investment inflows. Australia is a high-emitting country and it’s also particularly vulnerable to the effects of climate change – so we are exposed both to climate damage, and to attempts to avert it.
From a financial system perspective, the greatest risk doesn’t come from any one of these factors, but from the interaction of them through our mortgages, our superannuation nest eggs, our industries and jobs. Much of this is still far too dependent on a bet that we can escape reckoning with climate change.
Rudiger Dornbusch, the late, much-respected US-based economist, was asked
years ago why Wall Street didn’t foresee the Mexican peso crisis of the mid-1990s. His reply at first pointed out that an overvalued currency, on its own, wasn’t tantamount to a crisis. Then he said, famously: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.. It takes forever, and then it takes a night.”
Perhaps climate change will be different. Maybe it will all happen slowly and calmly enough for financial markets to adjust without the sort of chaotic outcome seen in financial crises of the past. The best way to ensure that is to start carefully examining these risks now.
Kate is Investment & Governance Manager at The Climate Institute.
Prior to joining the Institute in 2014, she worked primarily as a financial
journalist, winning awards for her work at the Financial Times and the
Australian. Earlier, she was a technology and business reporter for the
Australian, and online editor of Australian IT. Kate is a veteran of new
media, and was one of the first online journalists to be hired by the
ABC in the late 1990s.