Australia’s leading economic regulator has warned that climate change is already having a “profound” effect on the Australian economy, dragging down production, the value of Australian exports and the confidence of Australian consumers.
Reserve Bank of Australia governor Philip Lowe told a gathering of economic and financial leaders in Melbourne on Thursday that while monitoring climate change was not part of the regulator’s core responsibilities, it has been forced to speak out due to the scale of the financial threat climate change posed.
The RBA governor was speaking on a panel at the 7th Australia-Canada Economic Leadership Forum which was chaired by former treasury secretary and head of the department of prime minister and cabinet Martin Parkinson, and who also once served as the head of the department of climate change.
It is yet another warning that comes from not just activists or environmentalist, but the head of a comparatively conservative institution charged with overseeing the health of the Australian economy.
Lowe said that the Reserve Bank had been increasing its focus on understanding the impact climate change was having on the economy, and that it was becoming apparent that Australia was particularly exposed to new risks created by a warming planet.
“Addressing climate change isn’t something that’s a core responsibility of the Reserve Bank of Australia. But what we do have a responsibility to understand the economic and the financial implications of climate change,” Reserve Bank governor Philip Lowe said.
“The economic implications are profound. As the world is getting hotter, and the climates more variable, and we’re seeing already in Australia, perhaps more than anywhere else in the world, the effects of that, right now, we’ve got a drought that’s detracting this year a quarter of a per cent from GDP as it has for the last year.”
Lowe told the forum that climate impacts were being felt across the economy, impacting production and exports, as well as consumer confidence.
“Climate changes affecting the nature of production in Australia, the nature of investment, ultimately the nature of exports. At the moment, I think it’s affecting confidence of people, and therefore ultimately spending,” Lowe said.
“It’s affecting the availability and pricing of insurance because of these extreme weather events, and it’s affecting how we generate and distribute power. So the economic effects of weather related events are really profound. So as the central bank, we’re trying to understand the full dimensionality of those effects.”
As an immediate indication of the negative economic impact being caused by climate change, several of Australia’s largest insurance companies recording substantial revisions to their financial performance following a damaging Australian summer featuring fires, storms and flooding.
Insurance Australia Group recorded a 43.4 per cent fall in profit before tax for the first half of the financial year. Likewise, insurance company Suncorp recorded a 6.2 per cent fall in profits from ongoing operations over the same period.
While Lowe said that it was not the role of the Reserve Bank to prescribe a particular course of action with respect to climate change policy, it did have a responsibility to help understand how it may affect the economy.
“We have to understand that we’re not responsible for designing climate change policy, but we are responsible for understanding the implications of it.”
Lowe was joined on the panel by the governor of the Bank of Canada, Stephen Poloz, who agreed that climate change was an emerging financial risk and said that in addition to the risks posed by a changing climate, the global economy faced potential risks related to the transition to a decarbonised economy
Poloz said that it was crucial that the transitional risk was also managed, to minimise the impacts of stranded assets and a restructuring of the global economy.
“We’re going to transition to a low or lower carbon emission future, and that means that path has associated with it risks associated with either financial institutions or companies to which they have exposures,” Poloz said.
Poloz said that the growing focus on requiring publicly listed companies to assess and disclose the risks that climate change posed to their business operations was critical to being able to manage investments effectively.
“That’s analysing that stress testing the same way we do with household debt, and how it may impact the financial system when there is a shock. I put climate change in that in that space, and the push for transparency and carbon footprint reporting is really aimed at making sure that everybody has visibility, whether you’re an investor or other stakeholder, you have clear visibility on what those data are.”
All of Australia’s major financial regulators have issued warnings of the financial threat posed by climate change.
The Australian Securities and Investments Commission (ASIC) released updated guidance for company directors in August last year, aimed at ensuring directors were assessing and disclosing climate change related risks, citing the growing potential for legal liabilities for directors who fail to respond.
Executive member of the Australian Prudential Regulatory Authority Geoff Summerhayes told a meeting of institutional investors in October that the economic transition that will occur in response to climate change could happen at a much faster rate than many expect, particularly a switch to a clean energy system “will have played out by 2030.”