Heavyweights now speaking with one voice on climate change risks

Climate change is reshaping Australia’s economy and financial system, and its consequences will be devastating without urgent action. If that message had not hit home, the Reserve Bank of Australia’s intervention last week made it clear.

In last week’s address to a Centre for Policy Development public forum, RBA Deputy Governor Dr Guy Debelle said climate change will have “first order economic effects” and could have major consequences for financial stability if transitions are disorderly and abrupt.

Hot on Debelle’s heels, APRA subsequently released its first climate risk stocktake, calling for banks, insurers and superannuation funds to step up their responses. Its survey of 38 large entities suggests many are dragging the chain on climate-related financial analysis and disclosure.

The laggards can expect pressure to mount. APRA, its international counterparts and investors have signalled they want a little less conversation and a lot more action.

Looking beyond the headlines, there are three takeaways from recent, co-ordinated interventions by the RBA and other regulators on climate change.

First, for the regulators, this is about economics and not politics. The Reserve Bank, ASIC and APRA now speak with one voice on the serious economic challenges climate change poses.

The RBA’s statement built on equally powerful markers laid down by APRA’s Geoff Summerhayes in 2017 and ASIC’s John Price in 2018. Just as the RBA is considering how climate influences monetary policy, APRA and ASIC are examining the implications for financial stability and whether companies, investors and directors are doing enough to respond.

This clear public stance matters. In an era defined by a cautious (and often downright craven) approach to climate in politics and business, influential independent voices have stepped up in a way that is reverberating in boardrooms around the country.

This is no small thing. Summerhayes and Debelle were both appointed to their current positions by a federal treasurer (now Prime Minister) notorious for waving a lump of coal around in parliament. Their statements are reminders that, when we get it right, good governance and strong institutions trump politics.

The second key takeaway is that policy matters enormously. Dr Debelle emphasised that “the policy environment has a key effect as well as the climatic environment” when it comes to the economic impacts of climate change. He warned that decisions taken now could “limit or eliminate” our ability to manage future climate impacts.

APRA’s Geoff Summerhayes has also warned that policy delay or inaction, rather than minimising risks for businesses and the economy, could simply make these risks “greater and more abrupt.”

These are not partisan points. They are sober reminders that policy failures make climate risks even harder to manage for regulators and businesses alike.

Dr Debelle also made a subtler observation: policies to support a smooth economic transition must carefully balance impacts across society. He used the example of trade policy, where overall gains from trade could have been used to compensate those who lose out. As he flatly points out, “In practice, the compensation has generally not occurred.”

Adjustment costs from reform have “fallen on groups that have not received their share of the benefits.” Over time, this failure has not just undermined support for free trade – it has also contributed to a destabilising turn in politics.

Here the speech provides a crucial insight: managing the distributional aspects of climate policy will be critical to sustaining good outcomes.

The third key takeaway is that we ignore international developments at our peril. Dr Debelle cited policy-driven changes in China’s demand for Australian resources as a present-day example of climate risk for Australia. There are many others.

Global finance is being reshaped by new standards, regulations, financial products and markets to support a zero-carbon transition. Australia needs to access these markets – for goods, for services and for capital – to power its economy. But it will get harder to do so on favourable terms unless we lift our game, and our ambitions, on climate and sustainability.

Our regulators are on the case: the RBA has joined the global central banks’ Network for Greening the Financial System, while APRA is a prominent voice in the global Sustainable Insurance Forum.

It is time the government itself engaged seriously in the sustainable finance agenda, too, rather than sitting on the sidelines.

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