RBA Warns of Divestment Risk Amid Climate Change Threat

Continued lack of action towards mitigating climate risk increases the likelihood of more significant divestment from Australia.

The Reserve Bank of Australia (RBA) has warned that the country could face rising costs of capital and divestment by offshore funds as a result of risks presented by climate change.

In a speech delivered to a virtual CFA Australia Investment Conference, RBA deputy governor Guy Debelle described climate change as a “first-order risk” for Australia’s financial system, saying it has a broad-ranging impact on the country’s businesses and households.

While most Australian financial institutions now recognise climate as a risk, and the assessment of such risks has “evolved considerably” over the past five years, there remains “considerable scope for further improvement”, he said.

Debelle acknowledged the complexities that make climate change a challenging risk for financial institutions to assess, including the uncertainties involved in making assumptions about a possible future and the lack of quality, consistent, comparable data to facilitate climate risk assessments.

While work is underway to address these challenges, including at the international level, Debelle noted that climate risks have increasingly entered the discussion with foreign investors, including in his own conversations with asset managers.

“In our liaison conversations with many Australian companies, they also tell us that climate comes up constantly in their discussions with their equity investors and bond holders.”

To date, Debelle said there are only isolated examples of divestment from Australia because of climate risk, but that the likelihood of more significant divestment is increasing.

Divestment raises questions about how transition will be financed, as it could mean governments will have to deal with both the costs of compensating those adversely affected directly by climate change as well as structural changes to the economy as it evolves.

As investors globally adjust their portfolios in response to climate risks and governments implement net-zero policies, the cost of emissions-intensive activities will increase.

“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.”

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