Sweden dumps Australian state bonds over ‘climate inertia’

Concerns about Australia’s lack of action on climate change influenced Sweden’s decision.

Sveriges Riksbank deputy governor­ Martin Floden.

The world’s oldest central bank has dumped billions of dollars of bonds issued by Western Aus­t­ralia and Queensland because of concerns about Australia’s lack of action on climate change.

In a move that represents a new front in the global political and economic tussle over carbon emissions, Sweden’s Sveriges Riksbank said it had sold the holdings — along with bonds issued by the Canadian province of Alberta — as part of a new investment ­policy.

Sveriges Riksbank deputy governor­ Martin Floden said the bank’s decision reflected the fact that the two countries were among the highest per-capita emitters of greenhouse gas emissions. “Australia and Canada are countries that are not known for good climate work,” he said.

Mr Floden said about 8 per cent of the bank’s 500bn Swedish krona ($75.4bn) foreign exchange reserves are allocated to Aust­ralian and Canadian government bonds, suggesting up to $6bn of bond holdings could have been impacted by the move.

“We will not invest in assets ­issued by issuers with a large clim­ate footprint when we are choosing other assets than those best corresponding to our policy need,” he said.

Divestments on ethical and environmental grounds by sovereign wealth funds, churches and some major investment funds have become increasingly common in stockmarkets around the world in recent years, prompting most major companies to adopt considered public positions on the environment.

Sweden’s move could be the first time that government bonds have been sold in response to concern­ about government policy settings on climate change.

The immediate impact of Sweden­’s sale is likely to be minim­al, given the relatively small scale of the country in international bond markets and the fact economic fundamentals are the dominant driver of investor appetite for government bonds.

Longer term, however, the borrowing costs of Australia and the states could increase if other major bond investors adopt a similar position.

Emma Herd, chief executive of the Investor Group on Climate Change, said Sweden’s move was the natural next step in a trend across the international investment community. “This is not going away any time soon and this trend will continue, and governments both state and federal and all parts of the ­financial sector need to be very aware and managing climate change as an investment risk,” she said.

Australia’s carbon-intensive and trade-exposed economy meant managing climate change was a “fundamental economic risk” for the country.

“The challenge for Australia is that we have an incredibly problematic climate change policy discussion, we don’t have a clear plan for how we are going to manage climate change across the economy, and we don’t have a long-term plan for what we are going to do to help the economy transition over time,” she said. “These are the risks we will continue to see.”

News of Sweden’s decision appeared­ to have no impact on Australian bond prices yesterday, with jobs data instead weighing on the market.

AMP Capital chief economist Shane Oliver noted that the traject­ory of Australian bond prices­ over the past year meant Sweden would have likely made a handsome profit of between 10 and 20 per cent on its Australian bond holdings over the past year.

Mr Oliver said the relatively small size of Sweden’s holdings meant there was unlikely to be any lasting impact to bond prices.

That view was echoed by S&P Global Ratings analyst Martin Foo, who said Australian state government bonds were among the most highly rated globally.

WA Treasurer Ben Wyatt said the Swedish sale represented “a very small proportion” of total bonds on issue. “Regardless of their reasoning, I suspect it has been driven more around rating elements and profit-taking as they continue to hold NSW bonds, a significant coal exporter, and have taken the opportunity to make some social commentary.”