RBA Acknowledges Climate Change Risk

By Glenn Dyer | More Articles by Glenn Dyer

When it comes to renewables, regular readers of ShareCafe would understand that businesses of all kind – especially in resources and technology – are far ahead of the Federal government and many out-of-date politicians of all stripes.

This is confirmed by the way the businesses have led surge in exploration, finding and dealing in lithium, nickel, copper, cobalt, solar power, wind farms, potash – you name it – even gold, silver and hydrogen.

The WA lithium industry was being found and exploited well before state and Federal politicians even knew it existed.

And there are still many in business – especially in coal, oil and gas, and in the media and some parts of business, who reckon it’s all a load of rubbish. But, as always in the markets, the weight of money and the momentum associated with that investment always tells the real story and wins out.

And climate change and the rise of renewables are now very much top of the list for regulators like APRA, ASIC and the Reserve Bank.

In fact, RBA deputy governor Guy Debelle told a finance conference yesterday that climate change was a “first-order risk” to the system, with broad-ranging impacts on Australia including households and businesses.

That’s up there with the present overpriced housing boom.

He also warned that unless change here happens rapidly, Australian companies and the country generally will find there is an increasing cost to being slow and low.

Dr Debelle said a key issue was how investors changed their priorities as climate change materialised, and how they responded to the drive to 2050.

He said the Australian financial system and the broader economy could not escape what was occurring around the rest of the world.

Yesterday we got a perfect example of the rapidity of the change from one leading company – South32 – a coking coal producer, as well as other metals like nickel, silver, manganese – revealed a massive diversification that is actually a deeper involvement in renewables (to go with its nickel business) via the purchase of a 45% stake in a major copper mine in Chile (see separate story).

That is a near $A2.7 billion (including possible future payments) move and echoes similar moves by Sandfire Resources (into copper -$A2.6 billion), an acceleration of its existing copper businesses by Newcrest and of course BHP into both copper and nickel in Australia and Canada. Rio Tinto is looking at more copper here and lithium in southern Europe

Dr Debelle revealed that APRA (The Australian Prudential Regulation Authority) is leading a climate vulnerability assessment of the financial sector to see what changes in climate may due to the entire financial system.

He said that Australian financial system and the broader economy could not escape what was occurring around the rest of the world.

Dr Debelle noted there had not been any obvious change in offshore investor appetite for Australian bonds or shares.

“In Australia, over recent years, climate risks have increasingly entered the discussion with foreign investors. It almost invariably comes up in conversations I have with asset managers.

“In our liaison conversations with many Australian companies, they also tell us that climate comes up constantly in their discussions with their equity investors and bond holders.

“This has been another area of focus at the CFR (Council of Financial Regulators) because of the potential implications for the cost of and ease of access to capital for Australian corporates, and also for Australian governments.

“We discussed this issue recently at the Reserve Bank Board. Treasurer (Josh) Frydenberg talked about it in a recent speech. To date, we have only isolated examples of divestment from Australia because of climate risk, but the likelihood of more significant divestment is increasing.”

But he did reveal that Sweden’s central bank, the Riksbank stopped investing in Queensland and West Australian state government bonds “a few years ago”. Both states are big exporters of carbon.

“Investors will adjust their portfolios in response to climate risks. Governments in other jurisdictions are implementing net zero policies. Both of 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.”

But he wasn’t all negative. Dr Debelle did point out that the rewards for Australia are going to be considerable.

“There are plenty of opportunities for Australia. Reflecting our endowment, Australia has been an energy exporter for many decades. And there is no reason why this should change,” he pointed out.

“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. This is a great opportunity that a number of people have highlighted.

“The New South Wales government has articulated its strategy in its Net Zero Plan to transform the energy composition of the state while providing opportunities for those regions currently most dependent on fossil fuels. Other states have similar plans in train.

“Likewise, Australian companies are seeing the opportunities provided by the changing climate and investing in them.

“There are challenges ahead in managing the transition and in managing the financial risks. But with the risk comes a great potential for reward,” Dr Debelle concluded.

The federal government faces international pressure to increase its current climate targets ahead of the United Nations climate summit in Glasgow next month.

Prime Minister Morrison is aiming to commit to achieving net zero emissions by 2050, but needs to the National party to accept the inevitability of what is going to happen at meetings this weekend.

And ShareCafe readers have already a long list of companies large and small that are doing something – some may be just in it for the easy pump and dump, but the overwhelming majority see opportunities that didn’t exist five years ago, were being glimpsed three years ago (such as lithium) and since the start of the pandemic in early 2020, it feels there are so many ideas and opportunities and the capital to at least try them out that means investors will have a smorgasbord of chances to play their part in the renewables boom and make money.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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