Dollars and Sense: Mitigating climate risk in a warming world

05.12.23 By , , and

Climate change impacts every part of our lives – from our health, wellbeing and the safety of our communities, to the stability and security of the financial and economic systems on which we depend. Unless we take strong action this decade to address its drivers by rapidly cutting emissions, Australians face escalating and compounding risks now and for decades to come.

Australia’s Council of Financial Regulators has officially recognised climate change posing a financial risk since 2017. The Council is made up of our three key regulatory agencies – the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Australian Securities and Investment Commission, alongside the Federal Treasury. Together, these regulators have acknowledged that the risks climate change poses to the Australian economy are “first order” and have knock- on implications for the functioning of our economic system as a whole (RBA 2021)

Because climate change exacerbates and creates new financial risks, there is strong potential for these to build up within the financial system and tip into systemic risk which would have potentially devastating consequences for us all. We need coordinated action across the whole financial system to reduce its exposure to these risks- from banks, superannuation funds, insurers, investors, governments and regulators. We only need to recall the Global Financial Crisis to appreciate how disruptions to our financial system cause massive social and economic harm. This is why governments and financial regulators work very hard to avoid them.

Yet despite our ability to see climate risks brewing on the near horizon, actions by some financial institutions are still making the problem worse, not better. In the face of clear scientific consensus on the urgent need to phase out the use of coal, oil and fossil gas as quickly as possible, our banks are in fact enabling the opposite: lending billions of dollars to expand the fossil fuel industry. Australian banks have lent tens of billions to expand coal, oil and gas supply since the Paris Agreement was signed in 2015.

Bank lending to fossil fuel expansion drives climate change and, therefore, exacerbates climate risks. While the banking sector and debt financing are the focus of this report, others are also complicit – for example through equity financing via the share market, and superannuation funds. If our leaders have the courage to make bold steps in financial systems regulation, Australia has a golden opportunity to safeguard the health, sustainability and stability of our society before it is too late.

This report outlines current financial system risk arising from fossil fuel investment, focusing on bank lending to fossil fuel expansion and the potential to reform prudential regulation to ensure bank lending is aligned with a decarbonised future. The report also explores the loopholes our banks are exploiting that undermine their strong sustainability commitments. The report outlines global best practices and the positive potential effects of mechanisms such as the Task Force on Climate-Related Financial Disclosures / International Sustainability Standards Board mandate (effective from 2024), forthcoming Sovereign Green Bond program, and Australian sustainable finance taxonomy; and makes recommendations to strengthen the financial system and better protect it against climate change risks

Report key findings:

1. Climate change has the potential to become a systemic risk to our financial system, with grave consequences for our economy and society.

2. Banks can enable enormous social good, but are bankrolling fossil fuel expansion and driving the climate crisis instead. This is compounding climate risks in the broader financial system.

3. Improving the visibility of climate risk is welcome, but isn’t enough on its own to drive capital out of fossil fuels and into clean energy at the speed and scale needed now to tackle the climate crisis.

4. A coordinated effort involving banks, the Australian Government and financial regulators is needed to protect our financial sector, and enable every part of our economy to rapidly phase out the use of coal, oil and gas.