Financial markets are preparing for climate change and therefore we must
Australia’s interest lies in the efficient functioning of our markets so that the financial system remains stable, investors are able to make informed and timely decisions, and capital is accessible at the lowest possible cost.
Historically, Australia has relied heavily on imported capital to finance its economy. Whether it is in the form of foreign investment, which currently stands at $ 4 trillion, or in the form of wholesale financing of our banking system, of which about 20% comes from abroad.
As for Commonwealth government bonds, almost half are held by foreign investors. Reduced access to these capital markets would increase borrowing costs affecting everything from interest rates on home loans and small business loans, to the financial viability of large-scale infrastructure projects. Australia has a lot at stake.
We cannot run the risk that the markets mistakenly assume that we are not transitioning with the rest of the world. If we were to find ourselves in this situation, it would increase the cost of capital and reduce its availability, whether it is debt or equity.
Australia is addressing these challenges on two fronts.
First, government regulators have focused on disclosing material financial risks and promoting a framework of good practice following the recommendations of the Climate-Related Financial Disclosure Task Force. APRA has also developed guidelines on governance, risk management and vulnerability assessments for our largest financial institutions. This is designed to help them assess and effectively manage all of the significant climate risks they face.
The Reserve Bank of Australia, like its counterparts around the world, also considers the macroeconomic impact of more frequent weather events. As the Vice-Governor of the Reserve Bank Guy Debelle has said, these are not just temporary and cyclical events, but a change in trend that has major economic effects.
Internationally, Australia is actively participating in ongoing work through the G20 and other forums to develop coherent and effective climate disclosure frameworks. These actions are designed to ensure that the markets are fully informed and, therefore, able to price and effectively manage these risks.
Second, just as Australia advances in strengthening its regulatory and financial frameworks, we are also making progress in meeting our emission reduction targets. Emissions have fallen by more than 20% since 2005, which clearly highlights our 2030 target of 26-28% reduction.
The equivalent of 3 million cars have been taken off the road for 15 years. The transition is underway as 35 billion dollars of investments in renewable energies have been made in Australia since 2017.
One in four Australian households has solar panels, the highest rate per capita in the world. Our Technology Investment Roadmap will guide $ 20 billion in government funding and is expected to mobilize $ 80 billion in total investment by 2030.
Snowy 2.0 in NSW, Battery of the Nation in Tasmania and new interconnections across the country will create a more reliable, affordable and low-emission energy system.
Partnerships with Japan, Germany, Singapore and the UK will also stimulate new energy investments, especially in hydrogen, where we have a comparative advantage.
As recently as last week, in a joint statement by the United States and Australian foreign and defense ministers, our commitment is to “make low-emission technologies globally scalable and commercially viable”. which can “make it possible to achieve net zero emissions by 2050”.
These new investments generate more jobs, especially in our regions, because our economy has simultaneously grown by more than 40% since 2005 while, in the same period, our emissions have decreased by 20%.
Taking the next step and reaching net zero will require more investment across the economy. An economy-wide transition is needed, as in the words of former Bank of England Governor Mark Carney, “It’s not about just funding green activities or listing black those which are dark brown ”.
The transition requires a holistic approach, which includes investments in emission reduction strategies in all sectors, be it agriculture, mining, manufacturing and others.
For example, the resource industry, where the value of Australian exports of nickel, copper and lithium is expected to increase by $ 11.1 billion over the next five years, driven by demand for low-emission technologies like electric vehicles.
It is wrong to assume that traditional sectors, such as resources and agriculture, will experience decline during the transition. On the contrary, many companies in these sectors are at the forefront of innovation and technological change.
Iconic Australian companies like BHP, which have been around for over a century, are investing in renewable energy to power their mines, as they pursue their own goal of zero net operational emissions by 2050.
Another major Australian miner, Fortescue, has committed more than $ 1 billion to produce renewable green hydrogen to power future steelmaking activities. When I talk to these great Australian companies and others about where they are positioned for the future, they expect not only to exist in 2050, but to be bigger and stronger.
There is a message here for businesses: Opportunities will abound and it will be businesses that recognize these trends and put in place adaptation plans that have the brightest future.
At the same time, there is a message for Australian banks, super funds and insurers. If you support the goal of net zero, don’t stray from the very sectors of our economy that will need investment to transition successfully.
Climate change and its impacts will not go away. This is a structural and systemic change in our financial system, which will only accelerate over time.
For Australia, this presents risks that we must manage and opportunities that we must seize. This work is well advanced, but much remains to be done.
Josh Frydenberg is the Australian Treasurer