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Carbon pricing vital for financial stability: Westpac

Banking giant Westpac says the federal government must play a role in developing a price on carbon if the financial risks of climate change are to be understood and mitigated.
Michael Chen, the bank’s head of sustainability and prominent player in the Australian Sustainable Finance Initiative (ASFI), said without mitigation the effects of climate change would threaten the financial system’s stability.

“Central banks and regulators around the world are saying climate risk is financial risk, but the financial system hasn’t adequately priced in environmental and social risk, and this is a risk for the financial system’s stability,” Mr Chen told The Australian Financial Review.

“So as a big four bank, and as one of the major pillars of the Australian economy, of course financial system stability is something that we want to uphold.”

He said a market mechanism was needed to incentivise industry to reduce emissions. “We need to adequately price carbon in our economic decision-making. Not necessarily through a cap and trade system, but in some way, shape or form.”

To be effective, he said the federal government, which since the repeal of the Gillard government’s carbon tax has rejected calls for carbon pricing, would have to support such a mechanism.

Mr Chen was this week named as co-chair of the co-ordinating working group of the ASFI – an industry-wide initiative that aims to create a clear set of standards to promote environmentally and socially sustainable finance. It includes all four major banks, as well as big insurers, super funds and fund managers.

The five working groups are littered with prominent names from major financial insitutions, including Commonwealth Bank, ANZ, NAB, QBE, IAG, AustralianSuper, UniSuper, IFM Investors, QIC, EY, KPMG, HSBC and even energy giant AGL.

The groups will work on mobilising sustainable capital, designing rules that promote financial stability, making “better-informed decisions” and “meeting community expectations”. They will deliver a final “road map” in July 2020, which will contain recommendations both for the private sector and government policy.

Though both the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission are involved as observers, the federal government has declined to take part.

But Mr Chen said climate change was no longer a niche issue for environmental groups but almost universally accepted as a mainstream and severe financial risk. He said he hoped the fact the final road map would have the backing of the entire Australian financial industry would “carry more weight” with the federal government.
The Treasurer’s office was approached for comment but did not respond.

Sustainable finance stalwart Simon O’Connor, co -chair of the initiative and chief executive of the Responsible Investment Association Australasia, said the final road map would likely include proposals for new legislation, which would require government to act.

Despite the federal government’s lack of involvement, he said the initiative would “absolutely” be engaging with Canberra.

“We will be ensuring the government at a federal level understand the importance of this work, and will assist government in contributing to achieve overarching objectives, such as development goals and infrastructure goals”.

He echoed Mr Chen’s emphasis on the unity of the financial sector. “The fact that ASFI has been able to harness the talent and passions of over 130 individuals and commitment of 80 individual organisations demonstrates the real desire within the finance sector to lead change that delivers greater social, environmental and economic outcomes for Australians,” he said.

Chris Newton, executive director of responsible investments at industry super fund-owned fund manager IFM Investors, and co-chairman of the working group focusing on community expectations, said the “quick buck” mentality had to end.

“The worst outcome is that, as an industry, we fail to learn from the past and continually make the same mistakes in which we fail our customers, community and ourselves. Part of this – in our view – is that we need to garner a sense of shared purpose in that long term approaches will deliver the best outcomes collectively and individually.

“Making a ‘quick buck’ isn’t the right approach in the long run (especially as it often comes at the expense of the vulnerable) – if we don’t shake that short term attitude we will continually trip on our shoe laces,” he said.

Under the current Coalition government, Australia’s greenhouse gas emissions have steadily risen, with the latest official government report, released in June, recording a 0.8 per cent rise in the final quarter of 2018.

A report released by Ndevr this week found emissions had continued to rise in the three months to March, with emissions from electricity generation up 8.2 per cent on the previous quarter.

Earlier this week, a report commissioned by the Australian Conservation Foundation found Australia was on track to account for 13 per cent of the world’s carbon dioxide emissions, if coal and gas exports were taken into account.

Source: Financial Review