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Our new report outlines how Australia can learn from a new wave of global climate policy to create sustainable finance.

Climate Risk and the Financial System, authored by Chris Barrett, Executive Director, Finance Strategy, at the European Climate Foundation, and Anna Skarbek, CEO of ClimateWorks Australia, sets out the risks to global finance posed by climate change, and how financial systems around the world are responding to these risks and seeking to capture the opportunities. Australia has been slower to grasp this new financial agenda, but its natural resources and sophisticated finance sector provide it with a powerful opportunity to catch up quickly, if it is willing to do so.

For nearly 20 years, policymakers have sought to respond to climate change through the physical regulation of carbon emissions — either directly, or with various forms of carbon pricing. In the last three to four years, however, policymakers have begun to focus on the financial regulation of climate risk through the creation of a new agenda for banks, investment funds, insurance companies and financial regulators.

Central bankers and financial supervisors have started to tackle the risks of climate change, establishing the Network for Greening the Financial System in 2017. From a founding coalition of eight members, in 18 months the network has grown to 35 members, including the Reserve Bank of Australia. Each has pledged to “contribute to the development of environment and climate risk management in the financial sector, and to mobilise mainstream finance to support the transition toward a sustainable economy”.

Government policymakers are also moving: Europe has embarked on a major policy reform agenda and China, Australia's largest trading partner, has moved with speed on the same agenda, mandating liability insurance for environmental pollution and disclosures of environmental information.

Australia is disproportionately exposed to the risk of stranded assets. It has a highly carbon-intensive economy, and its national emissions have been rising since 2013. The further Australia departs from an emissions pathway that is compatible with the Paris Agreement, the greater the likelihood that it will have to drastically shift its policies to meet its carbon targets, potentially causing serious damage to the finance sector and the economy.

Yet Australia also stands disproportionately to benefit from a successful transition to a low-carbon economy. It has world-class solar and wind energy resources, base, mineral resources critical to battery production, and a large and sophisticated funds management industry that can provide financial services products to realise these opportunities. This report sets out what Australia stands to lose, or gain, depending on its response to this new frontier in global climate policy.

Download the report