Inquiry into the prudential regulation of investment in Australia’s export industries

Superannuation funds are required to act in the best financial interests of their beneficiaries. The investment decisions of institutional investors, such as whether or not to invest in Australia’s export industries, are based on an assessment of long-term financial risk and likely returns. Climate change represents one of the biggest financial risks across the market and one of the biggest drivers in how business will evolve into the future. 

Unmitigated climate change would have catastrophic impacts across the globe, including impacts on human health, biodiversity, water availability, and disruption of ecosystems. Climate change therefore presents significant financial risk to the global economy. There are physical risks to assets associated with rising mean global temperatures, rising sea levels and increased severity of extreme weather events (even if Paris targets are met). There are also transition risks, as well as opportunities, as the economy adjusts to a lower carbon future. An inadequate response to this transition raises the potential for reputation and litigation risk. The risks are deeply embedded across the financial system and therefore should be considered in baseline economic modelling, as well as investment and policy decisions.

In summary:

  • Climate change poses a material financial risk. As international demand for Australia’s emissions intensive exports declines, investing in these industries will carry increasing financial risks.
  • The international transition to net zero is already occurring and will affect the value of Australian exports. International markets are responding to climate change and transitioning to low-carbon economic models at an accelerating pace. If Australia does not align its climate-related policies with its international trading partners, the competitiveness of Australian exports will be at risk. 
  • Company directors and institutional investors are guided by risk management and best financial interests. Australian company directors and investors have a legal obligation to consider climate change in their assessment of financial risk and manage this risk in their decisions. These decisions are likely to be subject to increasing regulatory and public scrutiny.
  • Australia has much to lose from an unplanned and disorganised transition to a low carbon economy. It is estimated that the likely damage to Australia’s economy of leaving climate change risks unchecked is a reduction in GDP of 6 per cent by 2070, equivalent to $3.4 trillion in present value terms, and 880,000 jobs lost. An orderly, just and equitable transition to a low-emissions economy (including our export market) will cause much less disruption to Australian industry and communities than the damage caused by inaction.
  • Australia has significant opportunities for export growth and a stronger economy. Australia has the potential to develop new low-emissions exports that will compete successfully in international markets, generate economic growth and create thousands of new jobs.

The international transition to low carbon emissions is already occurring and is not dependent on the decisions of investors and prudential regulators within Australia. If Australian legislation and policy does not keep pace with the global transition and support a shift to low-emissions exports, Australian companies risk being left exposed, uncompetitive and unable to take advantage of significant economic opportunity to build a stronger export industry for the future.

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