Australian banks intend to reduce climate-risk exposure
December 9th, 2022
Australia’s largest banks expect to reduce exposure to climate-risk affected industries, according to new research by the Australian Prudential Regulation authority (APRA).
The Climate Vulnerability Assessment revealed banks intend to reduce exposure to sectors such as mining, manufacturing, and transport.
In response to increasing climate-related losses, banks would also adjust their lending practices. This may include cutting back on high loan-to-valuation mortgage lending.
Australia has struggled to introduce environmentally and socially responsible investment policies in particular, due to the country’s economy historically relying industries that are harmful to the environment, such as oil, gas, and mining.
Therefore, banks’ intention to reduce exposure to climate-change effected industries is a promising development towards a more sustainable future.
Australia’s new prime minister, Anthony Albanese, has expressed support for ESG, offering more hope for introduction of ESG initiatives.
Erwin Jackson, director of policy at the Investor Group on Climate Change, said: “The assessments show banks changing their lending practices; that means pulling back from banking vulnerable industries and regions. Investors are also undertaking similar approaches in response to climate risks.
During the study, Australia’s five largest banks considered physical, climate-related risks, such as heat, drought, and floods.
As well as short- and long-term risks emerging from the transition to a net-zero economy, like increasing carbon prices.
The research revealed that climate risks were unlikely to severely impact the banking system.
However, in the medium to long term, banks could experience increasing losses from their lending portfolios from physical and transition risks.
Helen Rowell, deputy chair of APRA, said: “Although those impacts are not expected to cause severe stress to the banking system, climate change could lead to the banking sector being more vulnerable to future economic downturns.”
The research also found that climate-related risks were more concentrated in specific regions or industries. As a result, banks expect to adjust their risk appetites in these areas.
Northern Australia was more likely to experience significantly higher mortgage losses because the area is more exposed to severe and prolonged physical risk.
Mining, manufacturing, and transports sectors were also revealed to be the most vulnerable to transition risk.
Last Updated: 9 December 2022