Reaching net zero requires a major bank reshuffle

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Insurers and asset managers are also facing huge changes. Former Australian Prudential Regulation Authority member Geoff Summerhayes is working on a proposal for insurers to have “carbon underwriting budgets” to manage emissions from their corporate clients. He adds that insurance companies around the world have also invested only 2.5% of their balance sheets in infrastructure – an amount that is sure to increase.

“This must change if we are to fund and sustain the trillions of dollars over the next few decades that must be spent in order for the planet to adapt to climate change and put in place resilience measures,” says Summerhayes, who now works at consultancy firm Pollination.

The second striking reality is that climate change is already a real risk for banks, as highlighted by a series of warnings from global regulators.

The Reserve Bank found last month that climate change could lower house prices in vulnerable parts of the country, including some Sydney suburbs, leaving banks more exposed if borrowers default.

US Treasury Secretary Janet Yellen warned last week that climate change was an “emerging and growing threat to the US financial system that requires action,” as the Biden government prepares to take strong action against them. climate risks for the world’s largest economy.

The harsh reality is that climate change is already a real risk for banks,Credit:Louise Kennerley

This should come as no surprise, and Australian banks, insurers and super funds have recognized these risks in the past, which is why the industry is cutting ties with coal miners and becoming more wary of oil and gas. .

Even so, there is no doubt that more aggressive action on the part of financiers will be needed to achieve net zero, for business as well as environmental reasons.

As the Moody’s rating agency said this month, a ‘delayed and messy’ carbon transition poses the greatest threat of losses to banks, as it could trigger sudden and drastic action from governments, businesses and regulators. Instead, Moody’s argued for a “swift but predictable” shift to climate-friendly finance, saying it would allow banks to integrate climate risks into their strategic decisions and business processes.

This is not all bad news for bank shareholders, however. A third major theme in recent weeks has been the growing awareness of the profitability of the green transition for financiers capable of exploiting the massive investment boom. In Australia, the poster child for banks profiting from the net zero crossing is the Macquarie Group, whose share price last week hit record highs above $ 200.

There has been a wave of equity research claiming the bank should benefit greatly from global action on climate change. Morgan Stanley analysts, who have argued that Macquarie should get a “green bonus,” estimate its green revenues could rise from $ 1.1 billion this year to $ 2.5 billion by 2025, accounting for 15 % benefits.

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Other banks will be vying for a share of the action, with Summerhayes describing the switch to green finance as “a massive global mega-trend that will continue over the next 10-20 years,” which offers as many opportunities as it does. risks.

The changes facing financial institutions will be “fundamental,” he says, but that is what is needed to deliver on the commitments of politicians.

“The financial sector is the artery of the economy. If the economy is to transition, the financial sector must facilitate this. The financial sector therefore has a huge role to play, ”he says.


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