Overview
2.1
Underpinning Australia’s industries, exporters and otherwise, is a system of prudential regulation. The Australian Prudential Regulation Authority (APRA) defined prudential regulation as:
… a form of regulation that requires financial institutions to manage risks to reduce the possibility of failure and, in particular, the possibility that they may fail to meet their financial promises to certain classes of liability-holders.
2.2
Financial sector authorities involved in the prudential regulation and/or oversight of the financial sector include APRA, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA). This chapter outlines the roles and responsibilities of these agencies and considers the advice and guidance each has issued in relation to climate risk. Since Australia’s exports are impacted by international prudential guidance, the chapter also outlines the global framework relevant to Australia’s export industries, as well as recent developments which affect them.
Australian Prudential Regulation Authority
2.3
APRA is Australia’s financial system prudential regulator, as provided by the Australian Prudential Regulation Authority Act 1998. The Department of the Treasury (Treasury) outlined that APRA is responsible for administering the prudential regulation of authorised deposit taking institutions (ADIs), which includes banks and credit unions as well as other financial institutions such as ‘general insurers, life insurers and friendly societies, private health insurers and most of the superannuation industry.’
2.4
APRA further outlined that its objective (under reasonable circumstances) is that:
a bank that accepts deposits from members of the public has the ability to at all times repay the deposits, on demand or in the future, along with the contracted rate of interest;
an insurance company that accepts premiums has the ability to pay claims by policyholders when an insured event occurs;
a superannuation fund trustee that receives contributions from members manages those to generate retirement income in members’ best interest; and
the Australian financial system more broadly remains stable and resilient.
2.5
In order to reach these objectives, APRA requires institutions to have ‘appropriate governance, risk management, internal controls and financial strength’ to mitigate risks. Risks could be financial, operational or behavioural.
2.6
Treasury also highlighted that prudential risk management ‘helps to protect the interests of beneficiaries of APRA-regulated institutions’ and underpins ‘the financial soundness of banks and other financial institutions’. In this way, prudent risk management not only helps in identifying and managing risks, but also in reducing the likelihood of a risk materialising. Where a risk does materialise, prudent risk management aids in reducing its severity.
2.7
APRA additionally advised that it sought to ‘avoid overly prescriptive regulation’, and instead used a ‘principles-based approach wherever possible.’
2.8
APRA outlined that its current priorities included:
… financial system resilience and recovery from COVID-19, improving outcomes for superannuation members, improving cyber-resilience in the financial sector, and transforming governance, culture, remuneration and accountability across all APRA-regulated institutions.
Australian Securities and Investments Commission
2.9
ASIC is Australia’s financial markets conduct regulator and is established and operates under the Australian Securities and Investments Commission Act 2001 (ASIC Act). Carrying out most of its work under the Corporations Act 2001, ASIC is responsible for ‘the registration and supervision of corporations and, in the financial sector, for licensing of financial service providers, credit providers and for market conduct.’
2.10
ASIC does not have any discretion to preference a ‘particular business, investment or economic activity over another.’ Instead, ASIC stated that:
the Corporations Act and the ASIC Act are framed on principles that seek to support and promote fair and efficient financial markets and confident and informed participation by investors and consumers in those markets. In many cases, these ends are sought by means of disclosure.
2.11
Disclosure requirements may include: a prospectus; product disclosure statements; financial reports; continuous disclosure; and/or disclosures required by the Australian Securities Exchange (ASX). ASIC advised that these disclosures allow investors and markets more broadly to ‘price securities and allocate capital efficiently.’
2.12
ASIC further advised that:
Australia’s regulatory settings on disclosure broadly reflect those in other developed economies and play an important role in ensuring Australia is and remains an attractive market for international capital to invest in.
2.13
ASIC is also the conduct regulator for superannuation, and advised that its ‘position of investment neutrality’ also applies to this sector. ASIC further outlined that the laws it administers in relation to superannuation ‘are concerned with the investment activities of superannuation funds, only to the extent that these activities relate to funds’ conduct towards, and disclosure to, fund members.’
Reserve Bank of Australia
2.14
The RBA is Australia’s central bank and operates under the Reserve Bank Act 1959. Its responsibilities include ‘the implementation of monetary policy and promotion of financial stability, as well as regulating payment systems and other financial market infrastructures.’
2.15
In accordance with its responsibility for promoting financial stability, the RBA has requested ‘that banks and other financial institutions take appropriate account of risks in their lending and investment decisions.’ The RBA noted that this ‘applies to investing in, or lending to, companies in the export sector,’ alongside other parts of the Australian economy. However, the RBA has also advised that it ‘does not have responsibility for prudential policy or guidance’.
Advice and guidance from financial authorities on climate change
2.16
In recent years, Australia’s financial regulators have provided advice on how financial institutions should manage and disclose climate change-related risks. In addition, Treasury, APRA, ASIC and the RBA have engaged in discussions around climate change through their collective membership of the Council of Financial Regulators (CFR).
Australian Prudential Regulation Authority
2.17
In accordance with its role of ensuring ‘the financial safety of individual financial institutions’ and promoting ‘the stability of the financial system’, APRA’s prudential standards and supervisory activities cover a wide range of risk classes and risks ‘to which regulated financial institutions are exposed.’ In relation to these risks, the regulator increases the intensity of its supervisory activities ‘where global or domestic circumstances warrant.’
2.18
APRA advised that relative to other risks, it ‘has only devoted quite limited resources to climate-related financial risks.’ Despite this, the regulator held the view that ‘climate change poses financial risks to financial institutions, and in this context it is important that there is a good understanding of the implications for individual regulated entities and for the Australian financial system as a whole.’
2.19
Accordingly, in April 2021, APRA released a draft Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) and sought stakeholder feedback before 31 July 2021.
2.20
APRA stated that CPG 229 was developed:
… in response to requests from industry for greater clarity of regulatory expectations in relation to how climate-related risks should be considered within existing risk management requirements … and examples of better industry practice.
2.21
Within the context of the Australian Government becoming party to the Paris Agreement in 2016, APRA ‘has been ensuring that financial institutions are aware of, and alert to, the risks arising from a changing climate and the responses to it.’
2.22
The proposed guidance was intended ‘to assist APRA-regulated institutions in managing climate-related risks and opportunities as part of their existing risk management and governance frameworks.’ This draft guidance does:
… not create new requirements or obligations on financial institutions, and is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.
2.23
In addition to APRA’s development of CPG 229, the Australian Banking Association (ABA) noted that APRA was conducting Climate Vulnerability Assessments (CVAs) with major Australians banks to ‘consider climate-related risk throughout a bank’s entire portfolio, including mortgages, business lending and institutional investment across all sectors and industries.’
2.24
APRA stated that CVAs will:
explore the potential financial exposure and macroeconomic risks to large ADIs, the financial system and economy from both physical and transition climate risks; and
assist APRA in understanding how the large ADIs might adjust their business models in response to different climate change scenarios.
Australian Securities and Investments Commission
2.25
Aligned with its focus on disclosure, ASIC’s regulatory guide regarding prospectuses describes the types of risks that ASIC ‘would expect a director to think about when … making a disclosure.’ ASIC affirmed that, like all risks, it expects listed companies to ‘consider whether climate risk poses a material risk for their business and, if it does, that that is described and disclosed.’
2.26
In September 2018, ASIC released Report 593: Climate risk disclosure by Australia’s listed companies (Report 593), which detailed its findings and high-level recommendations for listed companies, their directors and advisers on climate risk disclosure.
2.27
To ‘assist directors in developing their climate disclosure practices’, Report 593 made ‘high-level recommendations’ around strong and effective corporate governance as well as considering climate change, complying with the law and disclosing useful information to investors. For example, under strong and effective corporate governance, ASIC recommended that ‘when climate risk is material, consideration should be given to disclosing the company’s governance and risk management practices around climate risk.’
2.28
At the same time, ASIC explained that ‘whether or not a bank or other investor chooses to do business with a particular sector is a commercial decision from our perspective.’
2.29
The ABA also highlighted that in 2019 ASIC updated its guidance on the management of climate change risks to banks by:
Embedding the climate risk types of the Task Force on Climate-related Financial Disclosures (TCFD) into Regulatory Guide 228 – Effective disclosure for retail investors; and
Identifying climate risk as a system risk that could impact future financial outcomes of the entity and clarifying director’s responsibilities for such disclosures in Regulatory Guide 247 – Effective disclosure in an operating and financial review.’
Reserve Bank of Australia
2.30
While the RBA has not provided official advice on how financial institutions should account for and mitigate climate change-related risks, some witnesses provided examples of the RBA’s commentary on the financial implications of climate change.
2.31
The ABA drew attention to the 2020 Australia-Canada Economic Leadership Forum, and quoted the RBA Governor as saying:
Addressing climate change isn’t something that is a core responsibility of the RBA, but what we do have a responsibility to do is to understand the economic and the financial implication of climate change. The economic implications are profound. The world is getting hotter and the climate is more variable. We’re seeing already in Australia, perhaps more than anywhere else in the world, the effects of that.
2.32
Similarly, Westpac Banking Corporation (Westpac) cited a speech by the RBA Deputy Governor, in which he ‘endorsed Australian businesses to implement the recommendations of the TCFD, noting that “financial stability will be better served by an orderly transition rather than an abrupt disorderly one.”’
2.33
The Responsible Investment Association Australasia (RIAA) made reference to the RBA’s Financial Stability Review, released in October 2019, in which the RBA stated that ‘climate change is exposing financial institutions and the financial system more broadly to risks that will rise over time, if not addressed.’ The ABA pointed to the RBA’s Financial Stability Review from April 2021, which ‘identifies climate change as a key risk for banks.’
Council of Financial Regulators
2.34
The CFR is the coordinating body for Australia’s main financial regulators and comprises of APRA, ASIC, the RBA and Treasury.
2.35
The CFR has a formal working group on the financial implications of climate change, which ‘meets to consider and coordinate actions to address the implications of the changing climate for the Australian financial system.’ It additionally reports to the CFR ‘on international developments, emerging regulatory gaps and risks to the financial system in relation to climate change.’
2.36
The Insurance Council of Australia (ICA) referred to the CFR’s Quarterly meeting in October 2020, in which APRA’s announcement of CVAs was noted as a key development in the period ahead.
International prudential guidance on climate change
2.37
The Centre for Policy Development (CPD) stated that ‘the approach taken by Australian regulators on climate risk is consistent with steps taken by their global counterparts.’ Specifically, witnesses advised that APRA, ASIC and the RBA have provided advice in line with the recommendations made by the TCFD. In particular, Westpac was of the understanding that ‘APRA recognises the TCFD as a core driver of action to address climate-related financial risks.’
2.38
Some of Australia’s financial regulators also hold membership with international bodies such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the International Organisation of Securities Commissions (IOSCO).
Task Force on Climate-related Financial Disclosures
2.39
The TCFD was established in 2015 by the Financial Stability Board (FSB) after a request from the G20 ‘to convene public and private sector participants to review how the financial sector could take account of climate-related issues.’ In 2017 the TCFD released a voluntary and consistent framework to guide companies on disclosing their climate-related financial risks to investors, lenders and insurers.
2.40
Recommendations made by the TCFD were structured around four thematic areas: governance, strategy, risk management, and metrics and targets. Each theme was accompanied by a set of recommended disclosures. For example, the TCFD recommended that companies make the following disclosures in relation to governance:
Describe the board’s oversight of climate-related risks and opportunities.
Describe management’s role in assessing and managing climate-related risks and opportunities.
2.41
APRA’s CPG 229 ‘is aligned with the recommendations’ made by the TCFD and ‘was developed in consultation with both domestic and international peer regulators.’
2.42
ASIC’s high-level recommendations in Report 593: Climate risk disclosure by Australia’s listed companies, which were designed to assist directors in developing their climate disclosure practices, also makes reference to the TCFD recommendations. ASIC stated that ‘regardless of whether a company follows the disclosure recommendations of the TCFD’, it recommends that:
… directors and senior managers consider the TCFD’s final report which serves as a useful reference for climate risk and its assessment, governance and management.
2.43
Chartered Accountants Australia and New Zealand and CPA Australia (CAANZ and CPAA) jointly stated that ‘internationally and domestically the TCFD recommendations have been widely supported’ and emphasised that such international developments ‘could affect Australian businesses in some way due to shareholding, location of operations or otherwise’.
Network of Central Banks and Supervisors for Greening the Financial System
2.44
The NGFS is an international body of central banks and prudential regulators that ‘aims to contribute to the development of environmental and climate risk management in the financial sector and to support the transition to a sustainable economy.’ The NGFS has developed a methodology for analysing environmental risks and guidance for prudential supervisors. As of 30 June 2021, NGFS has 95 members, including the RBA and APRA.
2.45
The NGFS has identified climate change as a source of financial risk and stated that it is ‘within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.’ Modelling undertaken by the NGFS has found that ‘unabated climate change would result in a cumulative loss of global Gross Domestic Product (GDP) of 25 per cent by the end of the century from physical risks (worsening extreme weather) alone.’
International Organisation of Securities Commissions
2.46
IOSCO is an organisation consisting of securities regulators from around the world. ASIC is a member of the IOSCO Sustainable Finance Taskforce.
2.47
The Commonwealth Climate and Law Initiative (CCLI) drew attention to the IOSCO’s 2020 report, Sustainable Finance and the Role of Securities Regulators and IOSCO. In the report, IOSCO observed that ‘regulators, supervisors and businesses are increasingly recognising climate-related risks as a source of financial risk that can affect not only specific firms or sectors but more broadly the stability of the financial system.’ IOSCO further highlighted that:
Information on individual firms’ exposure to risks and opportunities and their strategies to address them can be material to investment decisions. Access to such information, when material, is fundamental for investor protection, efficient risk management and transparent, well-functioning capital markets and, ultimately, for an efficient allocation of capital in the economy.
Australian exports and investments
Current export market
2.48
In the December quarter of 2020, the total value of Australia’s exports was $108 billion, which accounted for approximately 21 per cent of GDP. Comparatively, Australia’s exports accounted for 24 per cent of GDP the previous year and averaged 18 per cent of GDP in the 1990s.
2.49
Asia continues to dominate Australia’s two-way trade flows, accounting for 65.2 per cent of the market. China is Australia’s largest trading partner, accounting ‘for over one-third of our total goods and services exports in 2019-20, followed by Japan and other economies in Asia.’
Current export trends by sector
2.50
The resource sector makes up ‘the largest share of Australia’s exports, recently accounting for over 60 per cent of exports, followed by services exports.’ In 2019-20 iron ore and concentrates, coal and natural gas remained the top three exports overall. The RBA observed that:
Growth in resource exports, in both value and volume terms, have been led by iron ore exports. Robust demand from Chinese steel producers and supply disruptions in Brazil have supported high prices and export volumes over 2020 and the start of 2021.
2.51
Export volumes of Liquefied Natural Gas (LNG) also increased ‘over the second half of 2020 and early 2021, driven by increased global energy demand as the northern hemisphere winter was colder than expected.’
2.52
While iron ore and LNG exports remained strong, coal export volumes declined slightly during the same period due to ‘weaker global demand.’ In particular, ‘coking and thermal exports to China have declined markedly recently and reached zero in January 2021.’ The RBA stated, however, that the ‘fall in coal exports to China have been partly (but not fully) offset by increased exports to other countries, including India and Japan.’
2.53
In relation to services export volumes, the RBA noted an approximate 40 per cent reduction since the start of the COVID-19 pandemic and attributed this to:
… a sharp fall in travel services as international border closures restricted travel. Tourism exports were near zero in the first half of 2020. Education exports also fell notably, as student enrolments declined and the share of students undertaking remote learning increased, which reduces the amount of export revenue in the form of students’ spending on such things as living expenses while in Australia.
2.54
The RBA also observed that rural exports declined over most of 2020, ‘with lower livestock-related export as producers rebuilt their herds’ after drought conditions in parts of Australia in previous years. This export sector began to recover at the end of 2020 ‘as favourable domestic weather conditions supported record local harvests and strong wheat exports.’
Contribution of resources exports to the economy
2.55
The Department of Industry, Science, Energy and Resources (DISER) stated that the ‘Australian resources sector has made significant contributions to Australia’s economic wealth, social and regional development, environmental research and technological innovation.’ Contributing approximately $35 billion of investment in 2019-20, ‘with forward expectations suggesting a modest lift in 2020-21’, the resources sector is said to be ‘the leading industry for capital expenditure’.
2.56
DISER also observed that the ‘resources export industry weathered the global impact of COVID-19 comparatively well’:
In 2019-20, the resources sector hit record export highs of $291 billion, and employment grew by over 20,000 between February and November 2020, despite the COVID-19 pandemic.
2.57
A number of witnesses supported DISER’s view that ‘encouraging further investment and growth in the sector ensures that Australians, especially in regional areas, continue to benefit from employment, infrastructure, and increased economic activity.’
2.58
For example, Townsville Enterprise Limited stated that ‘the mining and resources industry collectively contributes $3.2 billion to the North and North West Queensland regional economies, supporting 19,886 local full time jobs.’ Townsville Enterprise Limited also highlighted that the $9 billion paid by the industry in royalties each year from the regions are ‘shared across Queensland to fund … schools, hospitals and roads.’
2.59
Adani Australia discussed awarding Australian companies ‘more than $2.2 billion in contracts associated with the Carmichael Mine and Railway construction’ as at April 2021. It further elaborated that:
… our construction workforce has seen more than 2,600 people directly employed on our project with thousands more indirectly engaged. The Bravus Mining and Resources Carmichael Project is supporting a further 11,700 indirect jobs in the community.
2.60
Investment New South Wales (NSW) held the view that ‘mining’s economic contribution is more important than ever for our regional communities as they recover from the significant impacts of drought, bushfires and the COVID-19 pandemic.’ Investment NSW continued:
Mining operations in NSW have been able to continue throughout the three crises, ensuring job security for more than 30,000 people directly and 122,000 people indirectly… Royalties from the mining industry contributed $1.7 billion in 2019-20 to the NSW Government, $1.5 billion of which from coal, which was used to pay for essential services and infrastructure.
Current financing
2.61
The ABA reinforced that ‘Australia’s banks are supporting exporters in many ways’, including through ‘pre- and post-shipment finance, trade finance loans, domestic trade loans and assistance with working capital requirements, among other measures.’
2.62
The ABA highlighted the important role that Australia’s banks have in providing this support, enabling ‘businesses across a range of export industries to start up, invest, employ and grow.’ The ABA stated that benefits included:
Access to funding based on proven orders for the production and supply of the goods to importers/buyers;
Potential to negotiate more favourable commercial terms with buyers and provide a more competitive offering to their clients; and
The flexibility of trade finance loans allows clients to access funds when they need them most with alignment to specific trade flows.
2.63
Australia’s big four banks discussed their exposure at default (EAD) to the resources sector and in particular, coal mining. EAD refers to the total amount a bank would expect to lose if the loan defaulted.
2.64
The Australia and New Zealand Banking Group (ANZ) stated that it provides $14.2 billion in support for resources companies globally. At 31 March 2021, ANZ’s EAD to ‘coal mining was $1.1 billion, consisting of an EAD of $500 million to thermal coal mining and $600 million to metallurgical coal mining’.
2.65
The Commonwealth Bank of Australia (CBA) stated that its ‘exposure to Australian resource companies, while not insignificant, is smaller’ relative to its exposure to agribusinesses and service export industries. At 30 June 2021, CBA’s direct exposure to coal mining was approximately $0.33 billion, of which exposure was $0.3 billion to thermal coal mining and $0.03 billion to metallurgical coal mining.
2.66
National Australia Bank (NAB) stated that it had an EAD of $8.41 billion to the natural resources industry as of 31 March 2021. Of this, its EAD to metallurgical coal mining was $0.32 billion and $0.65 billion to thermal coal. NAB further elaborated that approximately 36 per cent of its ‘reported thermal coal mining EAD was for performance guarantees to rehabilitate existing coal mine sites.’
2.67
Westpac confirmed that its total exposure to the coal sector was $1,376.9 million as of 2 August 2021, which included an EAD of $249.8 million to thermal coal and $185.3 million to metallurgical coal.
International developments affecting Australian exports
Paris Agreement
2.68
Many witnesses pointed to the Paris Agreement as an international development that may impact on investment in Australia’s exports, particularly in the resources sector. The Paris Agreement is a legally binding international treaty on climate change that was adopted by 196 parties (including Australia) at the twenty-first session of the Conference of Parties (COP 21) in December 2015. Entering into force in November 2016, the Paris Agreement’s goal is to ‘limit the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels'. To limit warming in this way, parties are to achieve net-zero global emissions in the second half of the century.
2.69
The Australian Council of Trade Unions (ACTU) observed that:
In the global economy, the international policy signals are clear. The transition to the net zero emissions is already underway and is irreversible. Seventy per cent of Australia's two-way trade is currently with countries that have commitments for reaching net zero emissions by or near mid-century. The United States of America, Japan, Korea, Europe, China and Britain have all committed to net zero emissions in recent months.
2.70
Large global investors have also committed to the Paris Agreement, with many joining global investor groups and initiatives related to climate action. Such developments are likely to affect access to finance for Australia’s export industries.
Carbon border tariffs
2.71
The Australasian Centre for Corporate Responsibility and Ethical Partners Funds Management (ACCR and Ethical Partners) identified the European Union’s (EU’s) plan to implement a carbon border tariff through the Carbon Border Adjustment Mechanism (CBAM), as an international development that is likely to affect Australian exports. The ACCR stated that CBAM is aligned with ‘the EU's plans to cut emissions by 55 per cent by 2030.’
2.72
A carbon border tariff is a tax that is levied on imported goods ‘equal to the carbon price that would have been applied to the emissions arising from the production of those goods, had they been made in the jurisdiction which applies the tariff.’ In this way, carbon border tariffs can be used to ‘strengthen the competitiveness of industries already subject to carbon prices.’
2.73
If carbon border adjustments were to come into effect, the RBA explained that the imposed cost on Australian exports ‘would be proportionate to the emissions produced in the manufacturing process.’ This could be done ‘by introducing a tax equivalent to the effective emissions price facing domestic producers, or by requiring importers to purchase emissions allowances.’ The ACCR and Ethical Partners expected that CBAM ‘will impact on Australia’s emissions intensive imports into the EU, including aluminium, LNG and steel.’ In contrast, the RBA stated that Australia’s ‘exports of fossil fuels to Europe are not material—certainly relative to other countries.’
2.74
According to the ABA, the EU has also indicated its intention to ensure that the tariff is imposed not only on direct imports, but also on the materials or processes that have contributed to the production of an import. For example, Australian resources used in the production of Japanese steel ‘could incur a tax at the European end’ when exported to the EU. While the ABA acknowledged that ‘CBAMs are a relatively new proposal and are as yet an untried and untested instrument,’ it reiterated the EU’s plans to implement this mechanism by 2026.
2.75
In addition to the EU’s CBAM, the ACCR noted that ‘Canada, Japan, the UK and the US are also considering similar carbon border taxes.’ In particular, NAB highlighted action by Japan:
Japan is also studying carbon pricing, trading and border adjustment mechanisms. It is expected to announce policy positions late in 2021 that will align with and support targets to reduce carbon emissions by 46 per cent by 2030, from 2013 levels.
2.76
The RBA is of the understanding that while other jurisdictions have spoken about considering the implementation of carbon border adjustments, ‘those discussions are less well advanced than in the EU.’ Instead, the RBA discussed the controversial nature of such mechanisms, given ‘the legality of carbon border adjustments under existing World Trade Organisation rules’:
Some have argued that this would be equivalent to erecting new trade barriers and so it would effectively weigh on global growth, in particular that that sort of a measure could fall disproportionately on some emerging market economies. I know that the International Monetary Fund has pointed out that there are potentially some other tools that could be used that might be less damaging to global trade.
2.77
The RBA further observed that ‘carbon border adjustments are not under consideration in the parts of the world’ where Australia exports fossil fuels.
Key global investor initiatives and groups
2.78
The ABA reiterated that ‘the investor community is increasingly transitioning its focus towards a net-zero emissions economy.’ Similarly, Westpac noted that:
Investors are also active in encouraging banks to take action to address key risks in their business, including the risk of climate change. Climate change is a consistent theme in meetings that we have with both domestic and international institutional investors, who represent Westpac’s largest shareholders.
2.79
Given that Australia ‘is a net importer of capital’, the ABA highlighted:
Our banks—our financial institutions—rely on global investors to invest in our banks so that they can then lend money into a range of businesses, into things like the housing market, and can support the financial wellbeing of Australians and the growth of the Australian economy.
2.80
The ACTU further explained that ‘the international investment community tackles the global challenge of climate change through many voluntary bodies that have established global standards and frameworks to measure the effectiveness of companies.’ Such voluntary bodies include Principles for Responsible Investment (PRI), Climate Action 100+ and Net Zero Asset Managers Initiative (NZAMI).
Principles for Responsible Investment
2.81
PRI is a United Nations-supported international network of investors that seeks to promote sustainable investment through the incorporation of six environmental, social and governance (ESG) principles in investment decisions. PRI has ‘over 4000 signatories representing over US$121 trillion in assets under management— accounting for ‘more than half of the world's institutionally managed assets.’ Of its signatories, 190 are based in Australia, ‘including the major investment managers and superannuation funds, and collectively they represent A$1.1 trillion’ in the Australian membership.
2.82
PRI advised that its:
… signatories across the globe continue to advise us that climate change and its impacts on policy, on economics and on investments in every sector they invest in is the No. 1 issue that they are focused on from a risk perspective, but they are also looking at opportunities.
Climate Action 100+
2.83
Climate Action 100+ is an international investor-led initiative launched 2017, comprising of more than 545 international investors across 32 markets and representing $US 52 trillion in assets under management. This initiative ‘focuses investor engagements on 160 global companies that have significant greenhouse gas emissions and/or are critical to the net-zero emissions transition and to meeting the objectives of the Paris Agreement.’
2.84
Westpac stated that when Climate Action 100+ engages with companies that have high emissions, it requests them to:
implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risk;
take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below two degrees Celsius above pre-industrial levels, aiming for 1.5 degrees. Notably this implies the need to move towards net-zero emissions by 2050 or sooner; and
provide enhanced corporate disclosure in line with the TCFD.
2.85
ASIC also noted that the ‘Climate Action 100+ programme of engagement includes a number of large Australian listed focus companies.’ The Climate Action 100+ also includes PRI and the Investor Group on Climate Change (IGCC).
Net Zero Asset Managers Initiative
2.86
NZAMI ‘is an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.’ As of September 2021, NZAMI has 128 signatories, with combined assets under management of almost $US43 trillion.
2.87
To support investment decisions aligned with net zero emissions by 2050 or sooner, signatories have each committed to:
work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management (‘AUM’);
set an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner; and
review our interim target at least every five years, with a view to ratcheting up the proportion of AUM covered until 100 per cent of assets are included.
2.88
The IGCC noted that ‘the world’s three largest asset managers, BlackRock, Vanguard and State Street Global Advisors’ are now signatories to NZAMI.
2.89
In particular, witnesses pointed to a 2021 public letter to CEOs from BlackRock Chief Executive Officer (CEO), Larry Fink. In his letter, Mr Fink he observed that ‘the reallocation of capital accelerated even faster’ than he had anticipated, despite the ‘conventional wisdom’ that the COVID-19 pandemic would ‘divert attention away from climate.’ This letter requested companies:
… disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.
2.90
The BlackRock CEO also outlined his strong support for ‘moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.’
2.91
The ABA highlighted that ‘BlackRock does not see itself as a passive observer in the low-carbon transition’ and that:
[Firstly], they are going to see sustainability as 'integral' to portfolio construction… Secondly, they will be exiting high-risk investments such as thermal coal producers. Thirdly, they will be launching new investment products that screen fossil fuels.
2.92
Accordingly, the ABA reinforced that ‘these are not things to be taken lightly by the Australian businesses, including banks, who rely on international investment.
Committee comment
2.93
Effective prudential regulation underpins the healthy functioning of a financial system. As such, the Committee acknowledges the important role that Australia’s financial regulators have in maintaining the stability and resilience of our economy.
2.94
During the inquiry, the Committee heard that Australia’s financial regulators have provided guidance, aligned with the TCFD recommendations, about how climate change-related risks should be managed and disclosed. In particular, many witnesses pointed to APRA’s release of its climate change-related guidance, CPG 229. While this guidance aimed at creating some consistency with international counterparts, APRA has emphasised that CPG 229 does not create new requirements or obligations. Instead, it is intended to provide institutions with the flexibility to adopt an approach that is appropriate for their size, customer base and business strategy. As reiterated by the regulators, the Committee considers that climate-related financial risk should be considered as one of many identified risks.
2.95
The Committee appreciates the significant contributions that the resources sector, forming the largest share of Australia’s exports, has made to the Australian economy. The economies of regional areas have especially benefitted from employment, infrastructure and increased economic activity generated by the sector’s operations. As observed by DISER, the resources industry also ‘weathered the global impact of COVID-19 comparatively well’, with evidence of record high exports and growth in employment created by the sector in 2020.
2.96
From evidence provided on the current export trends of iron ore, natural gas and coal, which make up the top three exports overall, the Committee is optimistic about global demand for Australian resource exports in the short term. Global demand for iron ore and natural gas exports remained strong during 2020 and the start of 2021. While the evidence provided by the RBA demonstrated a reduction in coal exports to major trading partners like China, the Committee noted that this has been partially offset by increased exports to other countries, such as India and Japan.
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At the same time, future demand for Australia’s coal exports from some jurisdictions may be impacted by the growing focus on reaching net zero emissions by 2050. In this vein, witnesses drew particular attention to the EU’s plans to implement CBAM and the potential for other jurisdictions to implement similar mechanisms. As a relatively new proposal, with a high level of uncertainty around its implementation, the impact of this is yet to be fully understood. These developments suggest two things: first, that the future of Australia’s export profile may need to reflect a greater mix of its traditional strengths as well as new and emerging industries; and second, that Australia’s regulators, as well as financial services and investors, will need to closely monitor emerging risks to Australia’s export sectors.