Position on Climate Change

The Australian Bankers’ Association (ABA) recognises that climate change is a global problem that requires a sustainable global solution. Australia’s economy and environment are particularly vulnerable to the impacts of climate change. Governments, businesses and the community all have a role in driving changes in behaviour and responding to the challenges posed by climate change.

Introduction

The Australian Bankers’ Association (ABA) accepts the broad scientific and economic consensus that global warming resulting from greenhouse gas (GHG) emissions from human activities is contributing to changes in our climate. Failure to reduce GHG emissions and stabilise the world’s climate will have widespread implications for Australia – not just for our environment, but for our economy, national security and public policy.

Climate change and the observable effects of global warming are widely recognised by the scientific community with expected impacts including: increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea levels1. Climate change is also predicted to have a devastating impact on the global economy, and more broadly society, with hundreds of millions of people suffering coastal flooding, hunger, water shortages, displacement and exposure to diseases2.

The science and economics of climate change are converging. Governments, businesses and the community need to manage and adjust to the changes that are inevitable and mitigate the effects that are not yet a reality, with changes in behaviour, a reduction in GHG emissions and a stablisation of climate.


The Problem – it’s global

The ABA recognises that climate change is a global problem that requires a sustainable global solution. Australia’s economy and environment are particularly vulnerable to the impacts of climate change. Governments, businesses and the community (individuals) all have a role in driving changes in behaviour and responding to the challenges posed by climate change.

The physical impacts and the regulatory responses to climate change will present both risks and opportunities for the banking and finance sector. The physical impacts of climate change for Australia over the next century and beyond will manifest in a number of areas including: impacts on natural ecosystems, water resources, forestry and agriculture, public health, settlements and infrastructure and extreme weather related events3.

Physical impacts will affect the assets that banks invest in and lend against. Banks will need to understand the impact of potential business interruptions in some industries which are their customers, implement credit risk management techniques for both carbon emitters and carbon credit creators and price investment and lending risk. The banking and finance sector will also play an important role in decisions about agribusiness and other industries most exposed to the physical impacts of climate change.

Regulatory responses to climate change and a price of carbon, and the subsequent shift in financial projections, the uncertainty of risk modelling, the shift in lending volumes and revenues, the possible impacts on asset quality, the changes to the capital and financial markets and profitability of banks will all have direct and indirect costs and risks for banks, their customers and the broader economy.

New carbon market dynamics and impacts will also create technology innovation, new streams of revenue and operational efficiency opportunities for banks and their customers. Banks will have a significant role in facilitating the transition of companies and individuals to a future carbon constrained economy by mitigating economic risk and stimulating a lower carbon economy by providing new products and services and developing and participating in Australia’s emissions trading scheme (ETS) and a global carbon market. The banking and finance sector will also play a vital role in facilitating and promoting low carbon technologies, clean development initiatives and financing the required adaptation measures due to unavoidable climate change. 
 

The Solution – it’s a shared commitment

The ABA recognises that planning for the future properly means that Australia must anticipate weather variability, different climate patterns and changed economic structures and understand how to respond to the impacts of climate change. Government, businesses and the community (individuals) must all contribute to responses that address the challenges and impacts of climate change.

The Australian Government will have a significant role in establishing a clear legal and policy framework underpinned by credible regulatory and governance arrangements for Australia’s response to climate change. An effective policy response must include a suite of policy responses, incorporating global cooperation, emissions trading, adaptation measures and a renewable energy and clean technology strategy, as well as a number of complementary initiatives to support behavioural change in the wider community.  

Businesses will have a significant role in managing their climate and carbon risks and taking advantage of opportunities to support the transition to a lower carbon economy through new technologies, markets and business enterprises. As well as addressing their own emissions, banks will assist companies and individuals manage the uncertainty of climate change and understand how carbon may be an asset or a liability. Banks will also need to prepare themselves for the various risks and opportunities of climate change and impacts on the financial and non-financial performance of their business operations as well as those of their customers.

All members of the community will have a significant role in responding to carbon price signals in the market, education initiatives of the Government and products available to assist them reduce their own carbon footprint. The community will be critical in shifting behaviour from short-term to long-term strategic decision-making about the economic, social and environmental performance of Australia.

The banking and finance sector supports the case for early action as a more cost effective response to the challenges posed by climate change. Early action must take place via a comprehensive and multifaceted policy response which balances economic and environmental outcomes.

Global cooperation will be needed – but Australia must advance its own response to the challenges of climate change through a shared commitment. It is vital that Australia position itself to take advantage of the opportunities for innovation as well as contribute to the global solution to mange the uncertainty of climate change.

Our Principles on Climate Change

Climate change has the potential to have a significant impact on global economic stability, financial market growth, international competitiveness, the availability of resources, industrial performance, the price of energy, the value of companies and individuals’ prosperity and safety. These widespread financial and social ramifications will have a major impact on global banking, finance and insurance.

However, while climate change is inevitable, the extent of the impact of climate change in Australia will depend not just on the rate and extent of global warming and the response to changes by the climate system and the environment, but on the capacity of Australians to respond and minimise its impact through mitigation and adaptation as well as the resilience of our economy and society. We believe that Australians can mitigate the effects and adapt to the impacts of climate change despite the uncertainty inherent with the impacts of climate change.

The ABA and our member banks believe that the following principles should guide Australia’s response to the challenges of climate change:

  • Leadership – taking early action;
  • Policy – applying flexible market mechanisms and policy support; and
  • Practice – building knowledge and capacity.

The ABA’s Position on Climate Change sets out our views on the critical role of the banking and finance sector in assisting all Australians manage their exposure to climate change. However, the banking and finance sector can only act as quickly as other sectors – it will take Governments, other businesses and industries and the community to drive changes in behaviour, collaborate and coordinate sustainable responses to climate change.


Leadership – taking early action

The ABA supports Australia taking early action in the global response to the challenges of climate change. Early action to reduce GHG emissions will increase the effectiveness of our response and reduce the costs of actions over the long term.  

Australia needs leadership and early action to provide business, investment and operational certainty. Climate change has considerable economic, social, environmental and business risks that require significant and immediate action to reduce GHG emissions, minimise adverse impacts and adjust to the effects of climate change. Urgent responses will go to minimising the impact of climate change on Australia’s economy and society.

Governments, businesses and the community must take early action to mitigate, abate, prepare and adapt to the consequences of climate and weather related changes due to global warming.

Governments will need to provide consistent leadership and long-term guidance to companies and individuals, so that the market and the community understand the actions they must take to contribute to Australia’s response to climate change. Adopting clear transition and long-term national emissions targets will be required to facilitate a sustainable reduction in GHG emissions as well as provide greater investment certainty for long-term assets and support the appropriate pricing and management of carbon risk into the future.  

Banks will need to understand that climate change considerations should be integrated into all decision making processes, as the effects of climate change will impact all business units and all customers. Products and services offered by the banking and finance sector will be critical in shifting Australia from a high-emissions economy to a lower emissions economy – including strategies for large corporations through to products for individual consumers.

The community will need to understand their exposure to unavoidable climate change and the actions they can take to reduce the effects of climate change on their lives and livelihoods. 

Policy – applying flexible market mechanisms and policy support

The ABA supports Australia pursuing a market-based solution as part of a comprehensive and multifaceted policy response to control and reduce GHG emissions, facilitate innovation and investment and adapt to changed market conditions.

The banking and finance sector needs a clear, cohesive, consistent, long-term and balanced policy framework. Sustainable reductions in GHG emissions should be promoted through the design and introduction of an ETS for Australia. The ETS should be equitable, efficient, effective, transparent and flexible so that it may integrate with international schemes.

The ETS should be a ‘cap and trade’ scheme that includes a broad range of industrial sectors and GHG emissions and enables price signals to reflect the market forces of supply and demand. An efficient and liquid market should involve the trading of carbon assets based around the creation and existence of secure property rights and supported by standardised documentation. Allocation of permits should include a proportion of free allocation and auction in the beginning years of the scheme. Regulation of the scheme should be via an independent regulator that monitors the governance of the market and the effectiveness of the scheme in meeting its economic and environmental objectives4.


Around this market-based solution, complementary and practical strategies should also be identified to develop and deploy low emissions technologies, encourage renewable and efficient energy initiatives, promotewater infrastructure and sustainable forestry projects and other mitigation and adaptation responses to assist companies and individuals transition to a future carbon constrained economy.

Transition from a high-emission global economy to a lower emission global economy will require a comprehensive and multifaceted policy response that provides business, investment and operational certainty, while minimising artificial distortions on the economy and adverse impacts on the environment.

Practice – building knowledge and capacity

The ABA supports Australian companies and individuals having access to the knowledge and skills required to build capacity and capability to respond to the challenges of climate change.

Countries with financial, technological and educational capacity will be better placed to adapt to the vulnerabilities of climate conditions and variability. The banking and finance sector will play a critical role in assisting all Australians manage their exposure to climate change. Consequently, banks will have to adapt their policies and processes to meet the changing demands of the market and their customers and to maintain and preserve their own viability in the changing market conditions.

Governments and businesses must assist individuals to understand climate change risks and opportunities and the actions available to them to contribute to Australia’s response. Information will assist Australians better understand how the banking and finance sector will facilitate and contribute to the transition to a future carbon constrained economy.

Banks recognise that decisions taken now will have a major impact on Australia’s ability to adapt to unavoidable climate change and mitigate the further effects of climate change. For example, banks will need to understand the products and services that their customers need to address the challenges and impact of climate change now and into the future.

Individual banks will pursue actions suitable for their business, their customers and their stakeholders. Some areas that banks believe may be pursued in their response to climate change include:

  • Integrating climate change into their business strategy and building capacity to assess the implications of climate change, so the effects are understood and incorporated into their decision making processes.
  • Developing and delivering products and services to assist their individual customers take action to manage their exposures, including offering specialist ‘green’ banking, insurance and managed investment products as well as carbon offset products.
  • Reviewing, adapting and incorporating climate and carbon risk management techniques and reduction strategies into mainstream banking practices as well as building expertise to assist their business customers better manage their exposures, including carbon risk reduction, carbon finance, hedging and market strategies.
  • Facilitating and promoting innovation and investment in low carbon technologies and clean development initiatives, through venture capital, structured loans and project finance. 
  • Facilitating and financing the trading of carbon permits and credits initially via the ETS and then via a global carbon market.
  • Identifying investment and lending practices to facilitate the reduction in GHG emissions and stablisation of climate.
  • Developing tools and practices to assist individuals and businesses manage their exposures and assess the risks and opportunities of climate change, so that the financial and social implications of climate change can inform decisions about business, investment and shareholder ownership.  
  • Developing tools and practices to manage their exposures and reduce their own carbon footprint, including environmental and carbon performance criteria, risk identification modelling, controlling and reporting structures and supply chain management.
  • Adopting climate change disclosure and reporting practices to enhance the availability of information about material business risks due to effects of climate change that relate to the operations of the bank, such as reductions in GHG emissions, abatement actions, energy production and energy consumption.
  • Promoting information sharing among the banking and finance sector and with Government, other businesses and industries and community groups as well as encouraging the standardisation of carbon risk disclosure, reporting practices and internal governance structures.
  • Supporting research and development and analysis and assessment of the risk and opportunities of climate change for the banking and finance sector, its customers and the broader economy.
  • Influencing sound policy development, raising awareness of how bank customers can manage their exposures and reduce their carbon footprint, and contributing to a shift from a high-emissions economy to a lower emissions economy so that the market, companies and individuals can react in an orderly manner and reduce investment uncertainty.

To assist the banking and finance sector in its responses to climate change, Governments should adopt a comprehensive and multifaceted policy response that includes the provision of research, education, prevention strategies and performance assessment relating to the banking and finance issues that arise from climate change.


Glossary5

Adaptation – Adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities.

Certified Emission Reduction (CER) – A Kyoto Protocol unit equal to 1 metric tonne of CO2 equivalent. CERs are issued for emission reductions from CDM project activities.

Clean Development Mechanism (CDM) – A mechanism under the Kyoto Protocol through which developed countries finance GHG emission reductions or removal projects in developing countries, and receive credits for doing so which they may apply towards meeting mandatory limits on their own emissions.

Carbon finance – Finance involved in projects or activities connected to the carbon market.

Carbon risk – The primary risks posed by climate change are often categorised as regulatory, physical, market and reputational risk, resulting from both the impacts of climate change and the introduction of regulatory and market frameworks to reduce emissions.

Clean energy – Forms of energy which do not result in the release of GHGs, including renewable energy. Some also include nuclear and geothermal power.

Emission Reduction Unit (ERU) – A Kyoto Protocol unit equal to 1 metric tonne of CO2 equivalent. ERUs are generated for emission reductions or emission removals from JI projects.

Joint Implementation (JI) – A mechanism under the Kyoto Protocol through which a developed country can receive ERUs when it helps to finance projects that reduce net GHG emissions in another developed country.

Greenhouse Gas (GHG) – Atmospheric gases responsible for causing global warming and climate change. The major GHGs are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N20). Less prevalent --but very powerful -- greenhouse gases are hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

Mitigation – Efforts to reduce GHG emissions, but not to actions to deal with the impacts of the changing climate.


1. The Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report highlights that it is very likely or likely that over the last century climate change has, among other things, resulted in areas affected by drought increasing, precipitation levels decreasing, and heat waves, tropical cyclones, other extreme weather related events and weather instability increasing. http://www.ipcc.ch/

2. The Stern Review on the Economics of Climate Change warns that climate change is a serious global threat which demands an urgent global response. Using economic modelling the overall costs and risks of climate change could be equivalent to losing 5% of global GDP each year, now and forever, whereas, the costs of taking action now to reduce GHG emissions can be limited to around 1% of global GDP each year. 
http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm This was supported by economic modelling undertaken by the Australian Business Roundtable on Climate Change in 2006.www.businessroundtable.com

3. Preston, B and Jones, R (2006). Climate Change Impacts on Australia and the Benefits of Early Action to Reduce Global Greenhouse Gas Emissions. A consultancy report for the Australian Business Roundtable on Climate Change. CSIRO. February 2006.http://www.csiro.au/resources/pfbg.html 

4. The ABA supports the broad policy principles and key elements of an ETS for Australia as outlined in the Report of the Task Group on Emissions Trading.

5. 
Definitions of key terminology taken from the UN Framework Convention on Climate Change (http://unfccc.int/essential_background/glossary/items/3666.php) and UN Environment Programme (UNEP) Finance Initiative (http://www.unepfi.org/).

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