Climate Change Considered a ‘First-Order Risk’ in Financial System: Expert

By Marina Zhang
Marina Zhang
Marina Zhang
October 14, 2021 Updated: October 18, 2021

Guy Debelle, deputy governor of the Reserve Bank of Australia has said that the climate is now considered a “first-order risk” to the Australian finance sector at CFA Australia Investment Conference on Oct. 14.

“Most Australian financial institutions now recognise climate as a risk,” he told the conference.

He also added that in recent years in Australia, climate risks have increasingly been a topic of discussion with foreign investors.

Climate risks can be divided into physical risks and transition risks. Physical risks are the direct loss from a climate event, such as the increasing incidences of bushfires or floods and changing physical risks have a significant impact on mortgage portfolios.

There is also transition risk, which is the result of structural change to the economy due to the move to lower emissions. Changes in the economy due to changes in consumer demand or changed energy policies may also result in a change in the value of company assets.

Debelle said currently whilst the effects of transition risks on the Australian economy is small, the effect on the coal industry and for the regions that currently depend on it is not.

He said investors will adjust their portfolios in response to climate risks and governments are implementing net zero policies. The portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents.

“So, irrespective of whether we think these adjustments are appropriate or fair, they are happening and we need to take account of that,” Debelle said.

He also noted that one of the works they do in controlling climate risk is the development of taxonomies.

Taxonomies are a form of classification and can be used in the financial system to describe what is a ‘sustainable’ activity or financial product and allows investors to assess the sustainability of projects and products.

There are several taxonomies being developed globally, most notably in China and Europe. However, Debelle cautioned that while “a taxonomy may be appropriate for guiding sustainable finance decisions in a particular region,” but misallocation of financial may occur if it is applied to global investment decisions.

It is not the first time investors have been warned about risks around the transition to a low carbon economy.

A report published by Deloitte in 2020 noted that whilst “banks and other financial institutions must effectively collaborate with regulators to focus on the financial risk that arises from climate change,” they must also realise that the adaptation and transition of business models to a low-carbon economy could impact upon the business’s business models and creditworthiness of the companies as it involves redesigning of governances, policies, and processes.

Debelle maintained though that while the debate over climate change has continued to cast a negative light on Australia, he says there are plenty of opportunities for the country.

“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.”

Marina Zhang
Marina Zhang