The financial sector has a key role to play in helping the Australian economy shift towards a low-carbon future and in creating new investment opportunities along the way, a recent climate conference was told.

The Investor Group on Climate Change Summit, held in Sydney in October, examined the role for investors, and financial institutions more broadly, in tackling climate change as well as recent policy developments particularly from regulators that have implications for finance. The IGCC is a collaboration of Australian and New Zealand investors focusing the impact that climate change has on the financial value of investments.

“It’s about helping our customers with the transition,” Rosemary Bissett, NAB Head of Sustainability, Governance and Risk, told a panel at the summit on managing the economic transition, which was sponsored by NAB.

“Whether it be the farmer who needs to reduce his energy costs and move to more sustainable and cheaper sources of energy on the farm or more sustainable ways of farming, or whether it’s a university or company investing in renewables to get a more sustainable and reliable source of energy.”

NAB has been financing renewable energy projects in Australia and around the world since 2003, delivering 19 gigawatts of clean energy from over 125 wind, solar and other renewable energy transactions.  NAB believes we and the broader financial system have a role to play in the transition to a low-carbon economy, and we have committed to reach A$55 billion in environmental financing by 2025.

And in August, NAB announced a new collaboration with ClimateWorks Australia that will encourage farmers to adopt sustainable and profitable land management practices and help future-proof the agricultural industry against environmental challenges, including climate change.

Housing shift

Bissett noted at the conference that the traditional housing stock in Australia also needs substantial work to become more energy efficient, with the average home rating only a 2-star energy rating. “We’re looking at how we can help that shift towards 6-star homes. We’re thinking about what we need to do as a financial institution to facilitate that transition and help customers right across the economy,” she said.

Last year, NAB launched the world’s first mixed green building bond, an A$2 billion residential mortgage-backed securitisation that included a green tranche for six-star homes.

NAB has also been reviewing a number of sectors in its own lending book, both independently and as part of Phase 1 of an international UNEP FI project to build understanding of data sets available to assist with climate-related scenario analysis and risk assessment and explore climate risk governance and disclosure best practices to implement the Taskforce on Climate-related Disclosures’ recommendations.

Bissett told the panel that initial model available for use in Phase 1 of the UNEP FI pilot used average OCED/European data which did not take into account unique attributes of the Australian economy.  Additional Australian data is expected to be available late in 2019.

“We were part of the Phase 1 pilot with 16 other banks from around the world to look at the methodologies and experiment with tools to evaluate the use of scenario analysis to understand portfolio exposure to climate risk. It’s been incredibly useful to experiment with these tools as well as to share and bounce ideas off other institutions to see how they are handling the challenges,” she said.

Litigation risk

A major influence on the thinking of Australian boards has been the increasing focus from regulators including the Reserve Bank, ASIC and APRA on how companies are managing climate risk. The IGCC panel also heard that the Hutley legal opinion¹, which found that company directors who do not properly manage climate risk could be held liable for breaching their legal duty, has also galvanised thinking at the board level.

“We see litigation risk as one to watch,” said Bissett, noting this has been more of an issue in the US than in Australia so far. But she added that any cases that proceeded would be landmark cases and could affect project approvals and financing for assets in the future.

Read more about the IGCC Summit.

¹ https://cpd.org.au/2019/03/directors-duties-2019/