Australia’s access to capital may be strangled over climate stance

Article by Lucas Baird featuring CPD’s Climate & Recovery Initiative, published in the Australian Financial Review on 22 September 2021.

Australia risks punishment from global markets that will blow out the cost of, and strangle access to, capital for the corporate and government sectors if it keeps failing to develop a viable pathway to mitigate climate risk.

As warnings grow that Australia must accelerate efforts to decarbonise the economy ahead of the UN’s November Climate Change Conference of the Parties (COP26), AustralianSuper chairman Don Russell said the nation was sufficiently well-known but small enough for global players to single out.

“I’ve always said – certainly with my experience working for large American and German financial services companies – that Australia, unfortunately, is a 2 per cent country in the sense of key management time,” Dr Russell said.

“If they’re devoting just 2 per cent of management time to those judgements, we’ve got to be careful people are not getting signals about the country which lead them to make unfortunate and possibly misguided judgements.”

Dr Russell said this was a live risk for Australia, which must “pay careful attention to [its] international reputation, ahead of the summit in Glasgow.

If major international fund managers and sovereign wealth funds are keen to show their green credentials, they could shun government bonds, as the Swedish central bank has done with those issued by Queensland and WA.

On the corporate side, global investors may increasingly shun debt raisings that fund Australian mergers and acquisitions if they reckon it is in a sector that will struggle to transition in a decarbonised economy.

“Australia is sufficiently well-known that people will notice if you want to grandstand on the issue, but we’re not that big that a decision to exclude us from a portfolio has that much impact,” Dr Russell said.

This risk has increasingly garnered attention from the independent think tank Centre for Policy Development and its regular Climate & Recovery Initiative roundtables. In its last meeting in early September, concern emerged that Australia could become the favoured whipping boy of global funds and was largely missing out on the rush for green bonds despite their higher pricing.

A slide deck presented to the meeting says: “There is high demand for green government debt; Germany’s green bonds have a 3-5 basis point premium over matched non-green bonds.”

Dr Russell attended that meeting with other business leaders including Business Council of Australia president Tim Reed.

“Climate change is an economic risk and requires a whole-of-economy response. To keep pace globally and attract the investment we need to recover, Australia needs business, communities and all levels of government to drive this agenda and ambition together,” Mr Reed said.

Senior public servants from the Department of Prime Minister and Cabinet, as well as CSIRO boss David Thodey and Australian Renewable Energy Agency chief Darren Miller also attended.

Regulatory officials from the Australian Prudential Regulatory Authority and Australian Securities and Investments Commission were present, as well as the Australian Council of Trade Union president Michele O’Neil.

Treasurer Josh Frydenberg acknowledged the rising influence of climate on global capital markets in a podcast with Guardian Australia last month, and said it was now a “material risk” to local businesses.

The Reserve Bank has also been vocal on the risk, with the board noting in its June meeting minutes that climate-related risk had become a big factor in the asset allocation decisions of offshore investors.

“This development could affect the cost and availability of finance for corporations and governments,” the minutes said.