The two biggest global events of the past fortnight demonstrated the importance of the financial system to policy makers but have highlighted a dichotomy.
The first event was the international financial response to the invasion of Ukraine.
The isolation of multiple Russian finance channels, from central bank deposits through to individual investor decisions to divest holdings showed how quickly international investors, multilateral organisations and corporations could act, especially in response to urging, but more significantly, unambiguous support from governments and policy makers.
The second event was the release of the latest IPCC (Intergovernmental Panel on Climate Change) report: Climate Change 2022: Impacts, Adaptation and Vulnerability. Unfortunately, it has not yet enjoyed quite the same level of unanimity around the urgency to act.
Conflict galvanises political actors
Of course, large scale invasions in Europe have historical overtones that rightly, can’t easily be ignored. Previous conflicts on the continent have engulfed the world. Security issues becoming military action tend to galvanise political actors, as they should.
But the security implications of runaway or unaddressed climate change impacts also can’t be ignored.
Ambitions for territorial expansion can trigger immediate conflicts. But large-scale inundations, droughts, eco-system collapses, water and resource competition and mass population movements create the underlying political and economic tensions for even more conflicts.
The need to prepare mitigating efforts to cushion against consequences to come, strengthening resilience to help cope with those impacts, whatever their scale, is highlighted throughout the IPCC report.
But are policy makers listening? Are they prepared to take the urgent policy steps and partner with the financial sector to move at a pace now required?
We know that some climate impacts are irreversible and the implementation of mitigating and adaptive measurers are urgently required.
Fast and Slow in Australia
The contrast between the ‘here and now’ response by policy makers to the Russian invasion of Ukraine versus the slower action on climate issues has played out in Australia.
A government previously critical of ESG frameworks, investment, and divestment decisions by the finance sector to hedge or reduce carbon exposure is now an enthusiastic supporter of divestment to reduce exposure to Russian assets.
The enthusiasm expressed by government for action by superannuation funds is reflected in their support for the regulator to ignore any divestment-based impacts on returns as measured by the newly-minted investment performance test.
This step has provided clarity and certainty for investors to begin the process of unwinding holdings and disposing of assets by ameliorating a significant regulatory risk factor.
Who then buys the asset when divestment takes place and if in fact there is a buyer is another question with wider implications and a discussion for another day.
Policy clarity lacking on climate issues
But similar levels of urgency or clarity is lacking from national policy makers on climate, decarbonization and transition pathways to net zero.
These all require long term frameworks, decision making and careful risk assessment to assist the market in managing changes to capital flows both to avoid unnecessary value destruction as the transition gathers pace but also to maximise opportunities and outcomes.
When it comes to climate and other ESG issues many investors are also advising that the performance test is lessening their desire and ability to invest in longer-term climate solutions and move away from fossil fuels.
They are increasingly concerned about roadblocks and negative interventions, including a recent government move, albeit defeated in the Senate, to change the way proxy advisors operate in Australia.
Insurance and Climate Challenges
The insurance sector has its own unique climate challenges, caught between competing and contradictory demands. Insurance is seen as a fundamental service by government, business and the community.
Yet the reality of climate change in Australia outlined in the IPCC report including increasing weather severity, coastal inundation and heightened bushfire risk require an open acknowledgment of the coming reality.
Cities, communities, and businesses face increasing mitigation costs, an imperative to redesign and harden infrastructure and vital networks, development restrictions and, in some circumstances, relocation and coastal retreat.
Against a widespread and sometimes political expectation of an almost automatic coverage model and the ‘we will rebuild’ ethos, these are difficult conversations, long overdue and lacking a multi-decade perspective that need to be started now, with all stakeholders.
The space needs to be opened for developing a sustained domestic recognition of and response to, climate mitigation, resilience, and adaptation. From this, better decisions on insurance models should emerge.
An example for the future?
The latest assessments from Deloitte see Australian superannuation assets set to triple, reaching $6tn in the early 2030s and $9tn in 2041. This capital pool is just as exposed to international security risks and global climate impacts as other sectors.
In Australia, we need policy development and most importantly policy maker impetus, to fully face a myriad of climate and transition issues. Banking, finance, funds management, business and some forward-looking elements in the resources and energy sector all want change.
In two short weeks, we have seen what governments and the financial sector can do when policy makers set unambiguous international and domestic markers for action and when the private and public sector come together and move in the same direction.
Let’s use this as an example for the future.
