Australia’s central bank should be given an expanded role in delivering an orderly climate transition, according to a policy thinktank. The call comes amid a wide-ranging Treasury review into the Reserve Bank of Australia’s (RBA) objectives and the interaction between monetary, fiscal and macroprudential policy.
A submission to the review by the Centre for Policy Development (CPD) recommends updating the central bank’s legislative mandate to consider sustainability, climate risks and opportunities, and the goal of reaching net-zero greenhouse gas emissions. It says this could either be done through a change to the law or via a clarifying direction issued by the federal treasurer.
At present, the RBA’s statutory duty is to contribute to price stability, full employment and “the economic prosperity and welfare of the people of Australia”. Although it has taken some initial steps to address climate risk under these objectives, the CPD paper says an explicit change to the mandate would facilitate an “acceleration in practice” on tackling climate concerns.
The authors argue that “ongoing debate and interpretation” about the relevance of climate change to the existing objectives could cause “disruptive changes in policy under different governments and RBA boards”.
“Climate issues are perpetual, and mandate certainty and stability is therefore preferable,” they write. “Where governments are pursuing net zero, it is beneficial for them to consider changing central bank objectives to ensure the entire economic policy ecosystem is consistent with this goal.”
A review of 130 central bank mandates by researchers at the LSE Grantham Institute found that only 12% referred explicitly to sustainability, or to sustainable development or growth. A further 40% potentially had an indirect sustainability mandate via a duty to support government policies, which may include environmental commitments.
The absence of an explicit climate or policy support objective was found to restrict central banks in taking more proactive measures on greening financial markets, due to their more contested nature.
The CPD’s recommendations also include integrating climate considerations into the RBA’s collateral framework, more advice from the bank on economic responses to climate change, and an explanation from the governor and treasurer as to how the bank will support the net-zero transition.
In a recent speech, Jonathan Kearns, the RBA’s head of domestic markets, warned banks, insurers and other businesses to act swiftly to manage the financial threats from global warming. He suggested directors and trustees could face litigation risks if they fail to disclose, address and manage the effects of climate change sufficiently.
The RBA and its fellow regulators are setting supervisory expectations on the management of climate risk by financial institutions and have begun carrying out climate risk assessments on a handful of large banks. They are also developing a green finance taxonomy, which it is hoped will improve disclosures and redirect capital towards sustainable projects.
Kearns attracted controversy when he hinted that Australia may adopt a less restrictive approach than other jurisdictions towards including “transitional” sectors such as liquid natural gas.
The consultation period for the Treasury review closed this week, and a final report is due no later than March 2023.
This page was last updated February 20, 2023
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