RBA Debelle: Material Risk of Rise in Cost Of Emissions-Intensive Activities In Australia

By Sophia Rodrigues

(Sydney, October 14, 2021)—The cost of emissions-intensive activities in Australia are rising and there is a material risk is that the forces that are pushing up costs will intensify further, Reserve Bank Deputy Governor Guy Debelle said Thursday.

Debelle made the comment in an online address to the CFA Australian Investment Conference on the topic, “Climate Risks and the Australian Financial System.”

Debelle said that climate comes up in most conversations he has with foreign investors now which is a marked change from a few years. It’s the same for Australian companies with international investor base and the Australian Office of Financial Management and states’ debt managers.

This is one of the focus areas for the Council of Financial Regulators “because of the potential implications for the cost of and ease of access to capital for Australian corporates, and also for Australian governments.”

While there have been only few small changes in investor appetite for Australian bonds or equity due to climate concerns, there is a risk that more divestment decisions occur sooner rather than later, he said.

Debelle cited an example of the Riksbank that discontinued its investment in Queensland and Western Australia state government securities due to climate change but added that “the likelihood of more significant divestment is increasing.”

Whether investors make divestment decisions, or the affected entities make the change, they effectively increase 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,” Debelle said.

Debelle began the speech by describing climate change as the first-order risk for the financial system, which has broad-ranging impact on Australia, both in terms of geography and on businesses and households.

He talked about the Climate Vulnerability Assessment that the APRA is leading with assistance from the RBA and the Treasury which focuses on the climate risk of the five largest Australian banks whose lending books encompass all parts of the Australian economy.

“Because of the breadth of this work, our expectation is that this exercise will provide useful data and methodology for other Australian financial institutions, particularly asset managers,” he said.

Debelle also talked about the transition risk that is the result of the structural change to the economy from the move to lower emissions. Last month, the RBA published analysis of some of the potential impacts of the net zero policies of our largest trading partners.

“While the effect on the Australian economy is small, the effect on the coal industry, and those regions that currently depend on it is not,” Debelle said.

Another important work is being led by ASIC and is focused on improving the quality and comparability of climate risk disclosures by Australian companies.

“To be more usable, these disclosures need to be comparable and consistent across companies, both within Australia but also globally, given the sizeable share of offshore funds invested in Australia as well as the significant investments abroad of Australian asset managers,” Debelle said.

On the positive side, Debelle talked about the opportunities for Australia from climate change.

Australia has been an energy exporter for many decades and there is no reason why this should change, he said.

“Australia is also endowed with resources that have the potential for Australia to continue to be an exporter of energy – but renewable rather than emissions-intensive fossil fuels. This is a great opportunity that a number of people have highlighted,” he added.

--Contact: Sophia@centralbankintel.com