Act on climate or face higher borrowing costs, Climate Bonds Initiative warns policymakers

Australia is the 'canary in the coal mine' for climate mitigation risks in sovereign borrowing, CBI warns ahead of elections.

The Climate Bonds Initiative has warned that policymakers in developed market economies could face higher costs of capital and carbon risk premiums if they don’t act on climate change.

In a note issued ahead of the Australian elections, the CBI said the country was the “canary in the coal mine” for climate-driven risks in sovereign borrowing. It drew attention to analysis published by the Australian government in an annex to its long-term decarbonisation plan last November, which warned that sovereign borrowing costs could increase by between 100 and 150 basis points from 2031 if the country failed to set a net-zero target, rising to 300bps if Australia remained the only developed market not to adopt a target.

Some investors are already wary of investing in Australian sovereign or sub-sovereign debt due to policymakers’ perceived slowness to act on climate change. In 2019, the Swedish central bank ditched bonds from the states of Western Australia and Queensland, while Invesco told the Australian Financial Review in July that it could sell out of the country entirely if its climate change policy was inadequate.

Sean Kidney, the CBI’s CEO, said that while physical climate risk was having an impact on borrowing costs for some African countries and sub-sovereigns, the effect of climate change mitigation has so far been limited.

“Smaller countries with minimal capital markets are being affected already by the climate risk issue they’re getting downgraded as we speak,” he said.

“On the mitigation side, this is really a [question for] more sophisticated economies. Is an economy going to miss out on the opportunities of the green revolution? For Australia or Korea or Japan these questions are live.

“There’s also the nature of policy-driven impact, for example renewable energy cost reductions. Is this going to destroy some of the industries on which the wealth of a country is dependent, like coal mining in Australia? That raises the risk. So when a government does not seem to be taking action to mitigate the risk, then [investors] go ‘we’ve got to ask for more interest’.”

The CBI also called for more co-operation from multilaterals, development finance institutions and central banks towards mainstreaming sustainable debt within sovereign borrowing programmes.

“There’s a warning here for other nations. Commitment and progress towards climate targets are being embedded into sovereign debt considerations by [investors]. A slow walk towards 2030 and 2050 will be noticed,” it said.