Banks warn of risk to funding from climate and other ESG concerns

CBA institutional boss Andrew Hinchliff says a ‘wall of money’ means the bank must have a risk framework to deal with climate change.

CBA institutional boss Andrew Hinchliff says there is ‘absolutely’ a risk if the bank does not respond to shifts in global capital.

A top Commonwealth Bank executive has warned that failure to respond to climate change and the concerns of global investors with environmental, social and governance mandates could destabilise the bank by locking it out of competitive funding markets.

In testy exchanges with maverick government backbencher George Christensen and his joint standing committee on trade and investment growth, CBA institutional boss Andrew Hinchliff said there was “absolutely” a risk if the bank didn’t respond to shifts in global capital.

“So the risk for us is funding and capital dries up, not necessarily instantaneously but over time you’d expect your cost of capital to be affected by that,” Mr Hinchliff said.

“It’s a financial risk to the bank if our risk management framework around our risks is poor.”

Banks generally tap global markets for between 30 per cent and 40 per cent of funds which they use to write loans.

Mr Christensen, chairman of the so-called TIG committee, recalled the institutional bosses of the four major banks on Friday, interrogating them about their policies to exit the “lawful” and “profitable” thermal coal sector by 2030 and whether they were taking instructions from the prudential regulator.

Weekly market graph on Friday

While the banks denied that the Australian Prudential Regulation Authority was strongarming them into avoiding or investing in particular sectors, they said the bank regulator required “robust” risk management frameworks and appropriate levels of governance.

Mr Hinchliff said an example was APRA’s climate vulnerability assessment, for which an information paper was released on Friday.

The assessment, he said, asked the big four banks and Macquarie Group to run a variety of different climate-linked tests to understand the level of stress they presented and the capital that would be required to support deposit holders.

The banks were also expected to discern the impact of each scenario on their highest-emitting customers.

The scenarios in the information paper, which are aligned with those developed by the Network for Greening the Financial System, set out different pathways for the evolution of climate policy as well as possible environmental changes between 2020 and 2050.

Scenario 1 involves delayed but then a rapid reduction in emissions by 2050 involving higher transition risks, with scenario 2 predicated on current global policies and forecasts which are insufficient to avoid significant warming, leading to more severe physical risks.

APRA chairman Wayne Byres said in a statement that climate change was a global challenge, driving major policy responses and investment decisions around the world.

“These will have consequences for Australian companies, presenting both risks and opportunities,” Mr Byres said.

“Understanding how, where and over what time frame these risks will play out is a test for financial regulators as much as it is for institutions.

“In response, APRA will continue its collaboration with international peers to gain insights we can use to refine and strengthen our understanding, and ensure Australian financial institutions are appropriately managing those risks.”

Mr Christensen repeatedly pressed Mr Hinchliff on why CBA proposed to exit thermal coal based on a risk assessment when the bank’s exposure to the sector was only $300m.

The CBA executive said the bank took all its exposures seriously, both big and small, and there were general and “idiosyncratic” issues involved.

But Mr Christensen objected: “You are just talking about exiting a lawful industry in Australia. Why?”

Mr Hinchliff referred the committee chairman to the recent “Net Zero by 2050” report by the International Energy Agency, which said some sectors including coal would have a smaller presence in energy generation.

“Whether we believe that or not, or whether I believe that or not, there’s enough critical mass around the world that does believe it, and that’s the direction it’s travelling,” he said.

“So as you weigh up the prospects of certain businesses, you weigh up the prospect of demand (for their products) moving far quicker than we thought.

“That’s the risk, and while they might be very profitable businesses now, in some instances we might see that change very quickly.”

On the investor side, Mr Hinchliff said there was a “wall of money” shifting quite quickly to funds with ESG and green mandates.

The quantum, he said, was “way larger” than the available green or sustainable assets, although the situation would normalise over time.

In the meantime, expectations on CBA and its clients were “high”.

“If you go to Europe, the first question you get on any bond issue is your position on fossil fuels, your position on climate change, and can they expect more green bond issuance out of CBA,” Mr Hinchliff said.

“We think that path is accelerating around the world.”

National Australia Bank institutional boss David Gall said ESG was the dominant theme in a quarter of investor meetings – getting to net zero and the transition of clients.

NAB, he said, raised $30bn a year in wholesale debt markets to fund its lending activities; an amount that was roughly similar for each of the big four.

Mr Christensen asked Westpac institutional chief Anthony Miller how ESG requirements were forcing the bank to exit thermal coal when it was only 24 per cent-owned by foreign investors.

Mr Miller responded that the move was driven by an assessment of the risks; not an ESG agenda.

Mr Christensen switched the argument to housing – if there was a bubble in house prices, then why not exit the mortgages because of the elevated risk?

Mr Miller said the bank was “very conscious” of the housing risk.

“The outlook for the property market in Australia is extremely strong,” he said.