Overview
1.1
Banks, insurers and superannuation funds play a major role in the economy through the provision of credit, insurance and other financial services to businesses and consumers. In addition, superannuation funds protect and manage their members’ financial interests in order to finance their retirement.
1.2
The financial services industry is primarily regulated by two independent agencies – the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Broadly, ASIC is Australia’s financial market conduct regulator, while APRA has a focus on prudential regulation.
1.3
Other agencies including the Reserve Bank of Australia, the Department of the Treasury and the Council of Financial Regulators also have significant roles in the regulation and supervision of Australia’s financial services industry.
1.4
In recent years, these institutions have increased their focus on the financial risks associated with climate change. In particular, APRA has developed draft guidance for financial institutions on this issue, which outlines that they should factor climate change risks into their decision making processes. This increased focus reflects the concern that ignoring climate change risks could lead to institutional risks that could impact the broader financial system.
1.5
This trend is also evident internationally, with investors, governments, regulators, and central banks incorporating consideration of climate change into their risk management frameworks and decision making. An impetus for this growing focus was the Paris Agreement in 2016, which saw many countries commit to reaching net zero emissions by 2050.
1.6
The evidence received as part of the Inquiry into the prudential regulation of investment in Australia’s export industries (the inquiry) reflected these developments. In particular, while this inquiry’s terms of reference refers to investment guidance and advice provided by Australia’s financial regulators in general, the vast majority of evidence focused on climate change-related financial risks.
1.7
In addition, while the inquiry’s terms of reference refer to Australia’s export industries overall, the focus of many submissions was on resources exports, particularly coal. This was due, in part, to the fact that resources currently make up the largest proportion of Australia’s exports, and contribute significantly to economic activity and employment (particularly in regional areas). It also reflected that the increasing focus on climate change risks by investors, governments and regulators will likely impact this export sector, as many countries, companies and financial institutions look to reduce their emissions profiles. What this will mean for Australia’s exports, investment, and economy more broadly, is explored further in this report.
About the inquiry
Objectives and scope
1.8
On Wednesday, 17 February 2021, the Joint Standing Committee on Trade and Investment Growth (the Committee), adopted the inquiry following a reference from the Hon Keith Pitt MP, Minister for Resources, Water and Northern Australia.
1.9
As part of its inquiry, the Committee considered:
the investment guidance and advice provided by Australia's financial regulators to banking, insurance and superannuation institutions, and also to publicly-listed companies, in relation to investment in Australia's export industries;
changes in prudential standards and practices and their potential impact on investment in Australia’s export industries;
the approach and motivations of our financial institutions, including banks, insurers and superannuation funds, as well as publicly-listed companies, to their investment in Australia's export industries; and
the impact of these factors on Australia’s export industries; rural and regional economies, and the national economy more broadly in the context of the COVID-19 recovery.
Inquiry conduct
1.10
The Committee issued a media release on 17 February 2021 to launch the inquiry. The Committee also called for submissions addressing the terms of reference by 30 March 2021, and later extended this due date to 30 April 2021. Invitations to make submissions were sent to government agencies, financial regulators, banks, superannuation institutions, insurers, peak bodies, export businesses, business groups, and others.
1.11
The Committee received 72 submissions and 13 exhibits, which are listed at Appendix A and B respectively. The Committee also received two different form letters, which were provided by a number of participants with the same or very similar content. The first form letter was received from 88 participants and the second form letter was received from two participants.
1.12
The Committee also held five public hearings in Canberra, the details of which are outlined at Appendix C.
Report structure
1.13
Chapter 2 provides an overview of Australia’s prudential regulatory environment, international influences, and Australia’s export industries.
1.14
Chapter 3 outlines issues relating to access to financial services for Australia’s export industries, particularly the resources sector. It also considers factors taken into consideration by banks and insurers in making lending decisions, and the issue of activist pressure on financial institutions.
1.15
Chapter 4 discusses investment in Australia’s export industries, including superannuation investment. It further highlights emerging considerations of investors, particularly regarding climate related financial risks, and how this may impact the future of Australia’s exports.