Climate change and Australia's financial system

Malcolm Turnbull’s recent ascension as Prime Minister has renewed calls by climate change activists to make climate policy central to modernising the Australian economy.

“Failure to catch up with other nations risks leaving our pollution intensive economy out-dated and vulnerable to global investment trends,” said John O’Connor, CEO of The Climate Institute (TCI).

O'Connor's comments follow TCI's recently published discussion paper on the potential risks posed by climate change to the stability of the Australian financial system. Some key points for Australian directors to consider include:

  • Exposure of Australian banks – Australia’s big four banks are exposed to climate risk due, in part, to significant loans to companies with carbon-intensive assets, such as those in the energy, natural resources and transport sectors.
  • Exposure of superannuation funds and changes in investor behaviour – a number of global investors, insurers and market indices providers have begun incorporating climate change into their decision making by screening or excluding fossil fuel investments.
  • Exposure of Australia’s economy – uncertainty around Australia’s climate change policy may result in macroeconomic shifts, which could affect Australia’s financial stability and sovereign debt position, given Australia’s interconnectedness with foreign capital markets.

There is a growing body of research suggesting that companies and pension funds that score higher across environmental, social and governance (ESG) metrics have better long-term financial performance.

In the lead up to the United Nations Framework Convention on Climate Change in Paris in December 2015, there may be increasing pressure on companies, particularly on financial institutions, to provide greater disclosure of their ESG inputs, including greenhouse gas emissions.

What does this mean for directors and boardrooms?

Mark Carney, chairman of the G20’s Financial Stability Board, describes the issue of climate change as a “tragedy of horizons”; that is, a failure of governments and businesses to incorporate long-term considerations into their decision making.

A recent survey of global CEOs by PwC bears this out. In its survey, less than half of CEOs considered resource scarcity and climate change in the top three global megatrends that will transform their business over the next five years.

Similarly in the AICD’s latest Director Sentiment Index, only 11 per cent of Australian directors named climate change as one of the top three main economic challenges facing Australian business.

Several commentators, including former US Vice President Al Gore have suggested that directors ought to consider climate change in the context of their broader fiduciary duties. “Investors and companies have a fiduciary duty to include sustainability in decisions… failure to do so may constitute a breach of fiduciary duty by intentionally overlooking the possibility of maximising long-term risk-adjusted returns,” he recently stated.

For more information, visit the AICD’s Governance Leadership Centre.