“Trillions of dollars worth of foreign investment here in Australia,about half of our government bonds are bought by overseas investors. Around 20 per cent of commercial bank lending is supported by their borrowings overseas. It goes to the heart of the price you pay on your mortgage or your small business loan.”
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Reserve Bank deputy governor Guy Debelle,in a speech to financial advisors,said the financial system and the broader economy could not escape what was occurring around the rest of the world.
He said climate change was a “first-order risk” to the system,with broad-ranging impacts on Australia including households and businesses.
“Investors will adjust their portfolios in response to climate risks,” he said.
“These are effectively increasing 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.”
Dr Debelle said regulators were working on a new standard for assessing the risk of climate change for bank lenders and investors. He said asset owners,compared to banks,were exposed to “risk from the consequence of owning a stranded asset”.
Research by RBA economists last month revealed if China,Japan and South Korea reached net zero by 2050,Australian thermal coal exports to those countries would fall by 80 per cent. Thermal coal exports this year are expected to reach $21 billion. Exports of LNG,tipped to reach $49 billion this year,would fall by half.
Separate work showed that by 2050,254 “climate-sensitive suburbs” wereat risk of an increased drop in value with a hit to about 400,000 home loans.
In Sydney,most of the city’s northern suburbs from Mosman to the northern beaches and across to the Ku-ring-gai area stretching past Hornsby fell into this category,along with the Cronulla peninsula. Almost every coastal suburb in Brisbane was considered climate-sensitive,as was the area around Lilydale,Croydon and Kilsyth in Melbourne’s outer east and Mandurah to the south of Perth.
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Emma Herd,Ernst&Young’s climate change and sustainability partner,said the risk of stranded assets was being driven by the trade partners of Australia,such as Japan,Korea and China,which have “decreasing appetites for carbon-intensive imports”.
She said Australia faced “sovereign risk” as wealthy nations increased their climate action and decreased their appetite for carbon-intensive investments.
Europe has established a process for classifying the environmental risks of financial investments,which will capture Australia’s banks that operate in that market,and the US,China and Singapore and Australia are following suit.
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“If you classify investment decisions by its environmental impact it will make investors think twice about their investments in Australia,” she said.
It’s not only investors in the private sector that could be burnt by holding money in carbon-intensive assets.
Dr Debelle noted Sweden’s central bank,Riksbank,had stopped investing in Queensland and West Australian state government bonds.
“There is a risk we will see more of these divestment decisions sooner rather than later,” he said.