RBA sees Australian divestment unless more GHGs are cut

The Reserve Bank of Australia (RBA) has warned that the country's resources sector could face divestment from foreign investors unless there is more action in cutting greenhouse gas (GHG) emissions and accelerating the energy transition to a lower emissions economy.

Australia is dependent on foreign investment as it does not have sufficient capital savings to finance all economic investment activity, so the influences on foreign investment will ultimately impact the Australian economy, RBA deputy governor Guy Debelle said in a speech to the CFA Australian Investment Conference.

"To date, we have only isolated examples of divestment from Australia because of climate risk, but the likelihood of more significant divestment is increasing," Debelle said.

Australia is the world's largest exporter of LNG, iron ore and coking coal and the second-largest thermal coal exporter. Energy-related GHG emissions account for around 78pc of Australia's total emissions.

Discussions about climate change come up more in conversations the RBA has with foreign investors, which is a marked change from a few years ago, Debelle said.

Sweden's central bank the Riksbank discontinued its investment in Queensland and Western Australia (WA) state government bonds a few years ago, Debelle said. Queensland is Australia's largest coal producing state and WA the largest LNG exporting state. "There is a risk we will see more of these divestment decisions sooner rather than later," Debelle said.

Coalition debate

The comments come ahead of a meeting on 17 October by the National party, the junior partner in Australia's coalition government, to debate on whether to agree with its senior partner the Liberal party about deepening GHG cuts by 2030 from the existing target to a 26-28pc reduction below 2005 levels. If there is an agreement, the Liberal-National party coalition may make an announcement next week ahead of the UN Cop 26 climate conference in Glasgow, UK.

"Divestment raises the question as to whether change can be more effective from within, by influencing the approach of the entity you are investing in, or whether divestment is more effective," Debelle said. "If it is the

latter, it begs the question as to how transition will be financed, particularly in the case of governments that will have to deal with both the costs of compensating those adversely affected directly

by climate change as well as structural changes to the economy as it evolves."

Australian states have made far more ambitious GHG emissions cuts than Canberra, which if totalled together equate to a national cut of around 34pc by 2030 from 2005 levels.

Many financiers have pledged to end fossil fuel funding, while investment firms such as the US-based BlackRock and Vanguard are more focused on lowering the emissions intensity in their investment portfolios.

The tighter lending conditions to coal producers operating in Australia prompted Australia's resources minister Keith Pitt an A$250bn ($180bn) lending facility to firms wishing to invest in coal mining in Australia. Pitt's suggestion will require Australian taxpayers to finance coal mines operated by foreign-based firms such as Chinese state-controlled Yancoal and the Switzerland-based commodity trading and mining firm Glencore.

Australia's dependence on foreign capital has already prompted Australian treasurer Josh Frydenberg to call for a net-zero GHG emissions target by 2050, otherwise access to foreign capital markets will tighten and in turn push up borrowing costs that will affect the operating costs of all industries.

By Kevin Morrison