Overview
3.1
Financial services such as lending, banking and insurance are important aspects of doing business. Some export businesses from the resources sector have reported increased challenges in accessing these services, which may impact the long term viability of this sector. These challenges have, to varying extents, been attributed to the approaches of financial institutions towards managing financial risks associated with climate change.
3.2
Australia has a strong financial system, with banks and insurers being subject to a range of regulatory requirements. These institutions are paying increased attention to the financial risks associated with climate change, with regulators advising banks and other financial institutions to consider this as part of their risk management frameworks. This chapter discusses the factors affecting these decisions, as well as the impacts of them on Australia’s export industries. Australia’s major banks and insurers also operate within a global system and take into account the considerations of major global investors, including on environmental, social and governance (ESG) issues.
3.3
The extent of the influence of activist pressure on financial institutions’ approaches to climate change is also explored in this chapter. In addition to impacting the coal sector, examples of activist pressure were put forward as impacting the gas industry and live exports.
Access to finance and banking services
3.4
Access to finance and banking services was described by Centennial as being ‘an integral part of business.’ Whitehaven Coal agreed and outlined that ‘Australian exporters need access to strong, robust debt capital markets.’
3.5
The Bloomfield Group similarly explained the importance of capital for the mining industry:
Coal mining is a capital intensive industry, even after project establishment costs which range from hundreds of millions to billions have been expended … The capital intensive nature of the industry implies, for economic efficiency, a significant role for financiers and insurers in supporting the cash demand for capital outlays and for loss protection of the high value plant and equipment and infrastructure.
3.6
A number of inquiry participants described insurance and finance as being essential services. The Resource Industry Network (RIN), for example, stressed the importance of these services for businesses working with the mining sector:
To be able to service the mining companies, you have to have key levels of insurance to meet their contract needs. So, from that perspective, it's definitely an essential service. Access to finance is … an essential service as well for businesses. To be able to grow, do product development and take on more employees, businesses have to have access to finance so they are able to have cash to make that growth happen. …Without these key essential services, we're going to fall well behind and lose businesses out of the region because of it.
3.7
The Department of Industry, Science, Energy and Resources (DISER) acknowledged the importance of finance and outlined the impact that changes to financing policies and regulations can have on export industries:
Efficient, predictable access to finance for [Australia’s major export] industries and those that are reliant on them is vital. Access to finance is highly competitive for these sectors, especially those with significant capital expenditure and long-term investment structures so alterations to financing policy and regulations can have a significant impact on business outcomes.
3.8
CMAX Advisory went further and outlined the possible implications of refusing to provide financial services to exporting businesses:
The financial and related professional services sector plays a significant role in facilitating or restricting the growth of Australian exports. Blanket decisions on industry-wide divestment and the refusal of products and services to exporting businesses can have negative implications for our national economic growth and recovery from COVID-19, the creation and sustainment of local jobs, and Australia’s strategic interests.
Challenges in accessing financial services for the resources industry
3.9
DISER advised that ‘globally there is a growing trend where large financial companies are reviewing their support for fossil fuel projects and businesses.' In addition, DISER stated that in Australia ‘the four major banks have all announced plans to exit or restrict financing to customers involved in coal-fired power or thermal coal operations.’ DISER continued:
Australian and New Zealand Banking Group (ANZ) and the Commonwealth Bank of Australia (CBA) have committed to exiting direct financing of coal-fired power plants and thermal coal by 2030. Westpac Banking Corporation (Westpac) announced that, by 2030, it will stop lending to companies that derive more than 25 percent of their revenue from thermal coal, while the National Australia Bank (NAB) is committed to zero financing of thermal coal by 2035. Investment bank Macquarie Group will stop financing coal projects by 2024.
3.10
Westpac Banking Corporation (Westpac) further explained:
In line with increasing climate change-related financial risks, we do expect banks that have committed to the Paris Agreement to continue to reduce their exposure to sectors that are not aligned with a pathway to a net zero economy as a way to mitigate against the potential for growing credit defaults.
3.11
Centennial described this as a ‘significant shift’ by Australian banks, which had made it ‘increasingly difficult to do business in the coal sector.’ Adani Australia added that Australian banks and insurers were ‘pursuing a divestment agenda that will lead to a complete withdrawal of banking relationships and insurance coverage with the sector from 2030.’
3.12
CMAX Advisory stated that this appeared to be based on:
… a perceived reputational risk where financial institutions assess the public and their broader customer base view certain industries in a negative light and demand a change in approach.
3.13
The Hon Ron Boswell AO considered that the actions of Australian banks were driven by a ‘push by European and United States (US) banks, fund managers and insurance companies to deny finance, investment and insurance to companies in the Australian resources sector.’
3.14
Adani Australia outlined that it and its companies had been refused the following services by ‘one or a number of banks’:
Business loans and finance
Extensions to existing loan facilities
Bank guarantees/financial assurance for (performance and financial) commercial and government contracts
Bank guarantees/financial assurance for (performance and financial) commercial and government contracts where a cash back guarantee has been provided to the bank
Transactional banking services.
3.15
Adani Australia further explained that contractors working with Adani Australia had also been refused bank guarantees, loans and finance for projects associated with Adani.
3.16
However, Adani Australia confirmed that its activities in the Carmichael Basin and otherwise were ‘fully financed’ and appropriately insured.
3.17
The Australian Banking Association (ABA) asserted that ‘it would be far too wide sweeping to say that banks would have an exit strategy in relation to all of the resources sector’, but acknowledged that ‘thermal coal is a particular resource that investors globally and domestically have increasingly wanted to shift away from.’
3.18
The ABA provided further detail regarding the risks associated with the thermal coal industry from a banking perspective:
On the basis of [Australian banks’] knowledge not only of the individual companies on their books, but their knowledge of the movement in global investment markets and the movement in global climate change policy, they have taken the view that [the thermal coal] industry presents a growing risk on their books. It faces an increasingly uncertain regulatory future, and, in that light, yes, Australian banks are seeking to be diligent and prudent and to meet the expectations that their shareholders, their investors, the public and their regulators would expect.
3.19
DISER stated that businesses would adjust to these changing circumstances, and that future financing was ‘expected to increasingly be sourced from private equity and where available, from overseas providers or from end-user businesses.’
3.20
The Reserve Bank of Australia (RBA) outlined that the difficulties of some resources companies in accessing finance was not a ‘uniform experience’ across the sector:
… whilst it has certainly been the case that some coal-producing companies have faced difficulties accessing finance from local banks of late, it has not been necessarily a uniform experience. Some companies in our liaison program have reported that as domestic banks have withdrawn to some extent, overseas banks and certain select types of international investors have still been willing to provide funding. So it has not been a uniform experience across the whole complex.
3.21
In relation to concerns that some coal companies had been denied transactional banking services due to the industry they work in, the CBA advised:
There's nothing in any of our policies that stops us from providing transaction banking to legal companies. In particular, with the coal industry, we are a transaction banking provider and we continue to be a transaction banking provider.
Increasing costs
3.22
The Bloomfield Group stated that challenges in sourcing finance and investment in the coal mining industry had ‘significantly increased the cost of doing business, elevated business risk and stifled capital investment’. The Bloomfield Group added that this had also created a barrier to new entrants to the coal mining industry, which may reduce industry competition.
3.23
Whitehaven Coal argued that reducing lending to the resources sector would ‘act as a deterrent to investment in regional Australia’, and may also impede Australia’s economic recovery from COVID-19. Whitehaven Coal added that restrictive lending policies would not only impact coal businesses, but ‘the entire supply chain, small businesses, families, workers and many others across regional Australia.’
3.24
In addition, Whitehaven Coal outlined that ‘exporters will face more financial uncertainty if Australian banks fully withdraw from … backing Australia’s export industries.’ This included using ‘higher cost and higher risk debt sources’ and could also lead companies to seek finance from international sources which could ‘make the industry susceptible to geopolitical volatility.’
3.25
The Queensland Resources Council (QRC) went further and stated that:
QRC’s survey of members and their supply chains found that over a third (44 per cent) of the companies surveyed said that if these banking costs stayed at these levels for the next five years, then they would be unlikely to continue operating.
3.26
Yancoal Australia advised that reducing investment and insurance of resources companies was ‘inconsistent with an outcomes-based approach to reducing emissions’, as it would discourage the development of new technologies:
The policies that support a transition to a net-zero carbon footprint should be based on a technology-neutral approach to reducing the net emissions being generated. This does not translate into a blanket ban on, or the blacklisting of working with, the production of certain commodities. Such an approach removes the incentive on industry to invest time and money into lower-emissions technology.
3.27
Yancoal Australia added that this approach would also ‘price Australian producers out of the global coal market’, which would benefit ‘other coal-producing nations who are able to fill the void’. Adani Australia similarly stated that ‘by withdrawing services from the Australian thermal coal sector the finance and insurance sectors are exporting Australian livelihoods offshore.’
3.28
The QRC called for a ‘level playing field’ for the resources industry, which would involve ‘having the same opportunity to have financial and insurance services priced on the balance of that business’ risks and opportunities.’
3.29
The Bloomfield Group, Centennial and New Hope Group all highlighted the issue of rehabilitation obligations, and the role of banks and insurers in underwriting these obligations. New Hope Group explained:
Most mining lease conditions require that the holder provides a security to the value of the full estimated rehabilitation costs of a mine to the relevant State Government department. ... Security deposits are usually required to be submitted in the form of bank guarantees, insurance bonds, insurance policies or cash. …. Historically, banks and insurance companies have played a crucial role in issuing bonds and guarantees to underwrite rehabilitation obligations. The concern is, will this continue and what are the implications if it does not.
International financing
3.30
Centennial highlighted that international banks look to Australian banks’ decisions before investing in a business or industry:
Generally, offshore Asian banks will only participate in an Australian based syndicated financing deal if Australian banks are participating. Their view is that the Australian banks would know Australian mining assets better than they would. If Australian banks don’t participate it makes it highly unlikely that Asian banks will fill the void.
3.31
As such, Centennial argued that ‘strong leadership from “our” Australian banks is vital.’ DISER similarly outlined that often:
… international financiers will only support a project if it's being supported locally, and that is to say that Australian banks are a key part of the funding mix. … in addition to the drop in partly restricted access to local capital, domestic bank policies raise the cost of financing from international investors. These investors rely heavily on credit, work undertaken by Australian banks, and are more reluctant to join syndicated financing arrangements without local support.
3.32
Similar sentiments were expressed by Yancoal Australia, who stated that international creditors were ‘more willing’ to work with fossil fuel companies than their Australian counterparts. However, the domestic finance industry’s ‘reluctance’ to fund local mining operations was ‘being noticed internationally’, which was driving up costs.
3.33
Whitehaven Coal added that:
While the large multinationals have long enjoyed access to diversified international funding, local players such as Whitehaven have been more reliant on local banks and, subsequently, have a greater exposure to Australian banks placing restrictions on exporters.
3.34
Recognising these issues, DISER argued that ‘Australia's foreign investment law settings will be important to ensure that foreign investors, where appropriate, are able to invest in Australia's resources projects.’
Transparency and collaboration
3.35
Whitehaven Coal was concerned that there ‘is no clear guidance for resources companies around the parameters of the lending policies of Australian financial institutions.’ As such, Whitehaven Coal considered that that there is a ‘need for greater transparency and accountability in the banking industry towards support for Australia’s export industries’. In particular, Whitehaven Coal called for a greater understanding of how lending decisions were being made, ‘including the potential for unrepresentative activist groups to exert influence.’
3.36
The QRC highlighted frustration felt by its members in relation to the way financial decisions were being reached:
For example, mining equipment, technology and services companies now must make a special case for banking services if they have more than 30 per cent of their business working for coal companies. Decisions to apply this policy are often not made by local bank managers who have built up a working relationship with the client company. Instead, this decision is deferred to head offices in capital cities.
3.37
The Minerals Council of Australia (MCA) highlighted the importance of the mining and financial industries working together to manage climate change risks:
For real action on climate change, financial institutions need to work with the mining sector. Many are expressly doing so. Reducing greenhouse emissions is challenging and complex. The industry is ready to work with the financial sector. Prohibitions or restrictions that are not built on partnership and engagement do not deliver solutions.
3.38
Whitehaven Coal similarly highlighted that ‘decisions [by banks] are often taken with limited genuine consultation, adding further uncertainty to an already volatile trading environment disrupted by the global pandemic.’ To address this, Whitehaven Coal called for greater collaboration between export industries and financial institutions on Australia’s response to climate change challenges, as this would ‘enable Australia to achieve results that are beneficial to all stakeholders.’
3.39
The MCA similarly recommended that, in relation to the critical minerals sector:
… financial institutions work with the mining industry and government to develop financial products and programs that meet the unique development challenges of the burgeoning critical minerals sector.
3.40
APPEA echoed this recommendation in the context of working with the oil and gas industry and further suggested that:
… the Australian Prudential Regulation Authority (APRA) should engage with impacted stakeholders, including relevant industries and on government organisations, in any consideration of updated prudential standards. This would also compel the banking and superannuation industries to consult with those affected industries on significant changes to ESG strategies and practices.
3.41
Despite these concerns, the ABA advised that the banking sector is working closely with their customers in high-emitting businesses:
All of the banks who have large emitting customers are in the process of working with all of them to make sure that they have sufficient transition planning in place and that where they have identified risks and exposure, particularly in global markets, they have mitigation, adaptation and transition plans in place. Now, in many of the cases, banks are working as active partners to assist those customers to identify a transition plan and period of time during which they can reduce their risk, and banks can continue to support them with lending.
3.42
This approach was highlighted by Westpac, who advised that it was ‘engaging with our customers and providing clear, long term commitments to support them through this transition’.
Pace of transition
3.43
Adani Australia stated that while the banks supported a transition to net zero emissions by 2050, ‘there is little evidence of transitioning occurring.’ Instead, Adani Australia considered that its industry was facing an ‘acceleration of the withdrawal from the coal industry’ by banks. The QRC similarly described the changed approach by financial institutions as ‘sudden’ and further advised that:
While QRC understands the global changes in how the financial sector is appraising and managing climate risks, the rapid implementation of these changes is yielding unintended consequences and has reached a critical point which is now affecting the financial viability of Queensland’s export industries.
3.44
Whitehaven Coal agreed and stated:
Given the important role exports play in Australia, it is concerning Australian banks and other financial institutions are taking steps to restrict and withdraw funding instruments for some of Australia’s biggest exporters and emerging companies, particularly in the absence of a transition pathway that aligns with government policy.
3.45
The ABA stated that banks had been ‘very transparent’ in their decisions to transition away from lending to thermal coal companies:
Every bank, in their annual reporting, publish, as required, an environmental sustainability statement, and they have identified their time frame for exiting out of lending to the thermal coal sector. Australian banks will exit over a period of about 11 or 12 years, ranging from 2024 to 2035. It's important for these sectors to have a very clear line of sight about which financial institutions they can seek funds from, if they are seeking to expand or take on new business projects.
3.46
ANZ outlined its approach to transitioning away from thermal coal over a 15 year period, noting that it was not intended to be a sudden change:
We've had a policy that we would exit by 2030, and we've had that policy for around 15 years. We started these conversations with our coalmining customers back in 2016. … we understand that this is a significant impact on customers over that period, and we want to make that period as long as possible to ensure that there's time for the transition of their financing alternatives to occur.
3.47
In a similar vein, Westpac advised that it had made the decision to move away from the thermal coal mining sector in ten years’ time. Westpac explained that it had made this decision so that it could work with its two thermal coal mining clients over this time period ‘and assist them in any transition they need to obtain other sources of finance.’
Consideration of risk by financial institutions
3.48
The ABA explained that ‘Australian banks have a long and proud history of backing the export businesses of our country’, and that ‘a prudent approach to risk’ was central to ensuring a strong banking system.
3.49
The ABA discussed the factors which banks take into account when making investment decisions:
ABA member banks make investment decisions based on a wide range of elements including commercial considerations, risk factors, prevailing community and shareholder expectations, and the requirements of major investors and regulators both in Australia and overseas.
3.50
Westpac similarly outlined how the considerations it took into account when making lending decisions:
At Westpac, all our lending decisions are all made in accordance with our risk management framework. Our risk appetite is informed by our ability to measure and adequately manage any risk and our obligation to deliver the right return to shareholders, while making sure that we meet our regulatory and community obligations, is a constant balancing act. Put simply, we lend money to those we think are the right risk for the bank, balancing all the inputs into what informs our risk appetite. We don't do this based on ideology; we do it because it is our job to manage risks, to make returns for our shareholders and to act according to what the market and our regulators expect of us.
3.51
In terms of risk factors, the ABA outlined risks that the banking sector takes into account when making lending decisions. These included risks related to credit, liquidity, operations, markets and investments, strategy and business planning, insurance, and other factors.
3.52
In addition, the ABA described climate as an ‘emerging risk for banks, internationally.’ The ABA outlined that climate risk in a financial sense had three elements – physical risk, transition risk and liability risk:
Broadly speaking, banks are considering three elements of climate risk: firstly, physical risk—that is, the prospect or risk of direct damage to assets or property due to a change in climate; secondly, transition risk—the disruption to business from the adjustment to a low-carbon economy, including changing policies, not only from Australian governments but from those around the world, new technology and changing markets; thirdly, liability risk—the potential for litigation if directors and boards do not adequately consider or respond to the impacts of climate change.
3.53
The MCA acknowledged the risk of climate change and stated:
The Australian mining industry recognises the importance of managing the operational and financial risks associated with climate change. This is a challenge the industry shares with financial institutions where risks must be managed well.
3.54
NAB added that it ‘does not seek to avoid climate risk, but instead manages it by integrating climate risk into its risk management strategy and framework’, as was required by APRA’s guidance.
Investor expectations
3.55
The ABA advised that ‘the world’s largest investment funds expect banks to assess and act on climate-related risks.’ Westpac agreed and added that climate change was ‘a consistent theme’ in its meetings with ‘both domestic and international institutional investors, who represent Westpac’s largest shareholders.’
3.56
Westpac further outlined the importance of climate considerations to international investors:
Large investors are increasingly committed to net zero portfolios by 2050, and in some cases have a requirement for companies in their portfolios to be decarbonised by 2050 or earlier. … To continue to attract investment it is important that Australian banks are demonstrating meaningful steps to manage the key risks that are of concern to investors.
3.57
The CBA added that its investors’ interests were ‘broader than just climate’ - they were interested in the bank’s plans regarding wider ESG factors such as ‘modern slavery, human rights, our supply chains and our governance.’ NAB added that its international and domestic investors were becoming more focused on ESG policies, including its ‘fossil fuel pathways’ to net zero by 2050.
3.58
Westpac similarly stated that:
… Australian banks are reliant on overseas capital markets and our institutional investors, so they're an important source of funding. Without equity and debt investors, it's more difficult for us to lend to Australians. We say that our investors are making it clearer to us, over time, their expectation that we have clear policies and frameworks around ESG.
Regulatory guidance
3.59
As well as expectations from investors, Australia’s financial regulators have also signalled that financial institutions should consider and manage climate-related financial risks. The Centre for Policy Development stated:
Since 2017, APRA, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank have all clarified their position on climate risk within their mandates and what that means for the entities that they regulate. There have been major speeches they've given on those issues. The Council of Financial Regulators, which includes those three regulators along with the Commonwealth Treasury, have increasingly been a unity ticket on these issues, and they're undertaking a climate vulnerability assessment—which APRA is leading …—starting with the major deposit-taking institutions.
3.60
The ABA drew attention to APRA’s draft Prudential Practice Guide CPG229, which outlines:
Where an APRA-regulated institution has identified material climate risks, a prudent institution would establish and implement plans to mitigate these risks and manage its exposures, as well as regularly review and assess the effectiveness of those plans. For example, an institution might develop plans to manage concentrations in its portfolio to certain geographic or economic sectors with higher climate risks.
3.61
The ABA also highlighted that this guidance outlined APRA’s expectation ‘that an APRA-regulated institution would choose to work with customers, counterparties and organisations which face higher climate risks, to improve the risk profile of those entities.’ Notwithstanding, the advice also goes on to state:
However, where the institution considers this engagement will not result in the climate risks being adequately addressed, an institution may need to consider mitigation options such as:
Reflecting the cost of the additional risk through risk-based pricing measures;
Applying limits on its exposure to such an entity or sector; or
Where the risks cannot be adequately addressed through other measures, considering the institution’s ability to continue to relationship.
3.62
The Maritime Union of Australia supported the regulatory focus on climate change, and further recommended that APRA’s guidance on climate change risks consider the ‘human element or social risk from climate induced industrial transitions, such as the loss of jobs and income’.
3.63
The guidance provided by Australia’s prudential regulators to financial institutions was described by the Department of the Treasury (Treasury) as being ‘very closely aligned with what's happening globally and the progress that we're making in Australia is relatively good by global standards.’ Treasury outlined that an issue that regulators globally were focused on was:
… strengthening the prudential management of climate change risks to make sure that financial entities are identifying the risks that they face, managing them and disclosing them appropriately to the market. That is being done by a wide range of prudential regulators around the world … The approach APRA has taken is very consistent with what we're seeing globally.
3.64
In addition, Treasury stated that prudential regulators and central banks were involved in ‘climate vulnerability assessments’ (CVAs), which saw them ‘working with individual large financial services entities to run scenarios that assess the extent to which they're vulnerable to climate change.’
3.65
At the same time, Treasury pointed out that Australia’s financial regulators had not advised any financial institution to cease support for the resources sector:
There's nothing in any of the guidance or the regulations that prescribes that banks should not invest in coalmines or those types of things. There's no guidance along those lines. I don't see anything in the regulations that prevents entities from doing that, provided it's done within a prudent risk-management framework.
3.66
The CBA agreed that APRA’s guidelines do not say that banks should, or shouldn’t, invest in a particular sector. Instead, the guidelines provided ‘a risk management framework’ that covered measuring and governing risks. The CBA also highlighted APRA’s CVAs, where APRA was asking banks to ‘run a variety of different scenarios to understand how those scenarios affect the stress on the bank and the capital that we have to support, ultimately, the deposit holders.’ As a result the CBA stated:
There's been no direction around coal or any other industry, for that matter, but, when you feed it into the risk management framework in the models that we run, there are natural consequences associated with that, and we would expect to be far more granular in the way we think about a lot of industries, frankly, going forward as momentum in this space continues to grow.
3.67
APRA explained how it would advise a financial institution that was not managing risk appropriately:
If we didn't think they had the capacity to manage the risk and they were putting in jeopardy the interests of the people we care about, which are insurance policyholders, bank depositors and super fund members, there would have to be a response to that. The response could be stronger risk management et cetera; it could be stronger financial support for the risks; or it could be that the institution chooses to change its risk profile.
Insurance of export industries
Challenges in accessing insurance
3.68
DISER advised that there was ‘a trend globally for insurance companies to stop insuring coal projects.’ In the domestic sphere, DISER noted a similar trend:
... many domestic insurance companies are announcing plans to limit insurance products to the sector, in particular to the thermal coal industry, with a view to ceasing the service offering altogether over the next 10 to 20 years. Insurance Australia Group, GBE and Suncorp have all announced plans to phase out underwriting new thermal coal projects and coal power stations between now and 2030.
3.69
The RIN advised there was a ‘growing concern around insurance accessibility and affordability for businesses associated with coal mining.’ The RIN added that:
… there are local businesses being denied insurance for servicing coal industry customers, which has them questioning the feasibility of their operations to continue. These decisions restrict a business’ ability to operate with a number of RIN members believing the limitations for [mining equipment, technology and services (METS)] businesses is at a threshold where they are asking if it’s tenable to continue to operate.
3.70
The Bloomfield Group advised that ‘most major insurers and re-insurers are no longer willing to insure coal mines.’ Yancoal Australia added that the ‘exit of a number of carriers within the market is already increasing the cost from those who remain in the market.’
3.71
Whitehaven similarly noted that accessing insurance was becoming:
very difficult, to the point where the industry is now exploring self-insurance opportunities, given that we understand that this is not a matter of profitability; in fact, insurance claims in our industry are very low, relative to the premiums that we pay.
3.72
FIELD Engineers similarly noted the increase of insurance relative to other costs in the sector:
In the last six years, the PI insurance—our biggest insurance ingredient—has changed dramatically. It's gone up annually. The annual increase, compounding every year, has been 61 per cent. Contrast this against the CPI of 1.5 per cent for the rest of the economy. It's 18 times higher now than it was six years ago, and we now spend more on this intangible risk-management tool than we spend on IT—engineers' demand and need for IT is quite huge—or diesel for our vehicles to drive in and out. To give you a sense of perspective: our insurance is now our biggest single cost other than wages.
3.73
New Hope Group expressed similar sentiments and stated that its insurance had ‘more than doubled’ over the past four years. The MCA stated that across its industry, insurance premiums had increased ‘up to 600 per cent’.
3.74
The MCA advised that this was in spite of the fact that ‘there is no evidence that insurance for operations operating today is … a heightened insurance risk’. Similar sentiments were expressed by Picnic Labs, which advised that the withdrawal of insurance from companies associated with the mining sector was ‘not related to the underlying activities being of a nature that [is] uninsurable.’ Instead, Picnic Labs associated this with ‘virtue signalling’ or ‘responding to pressure from activist investors.’
3.75
BMD Constructions advised that the Australian insurance market was being ‘dictated to by broad global policies which fail to consider the impacts in the Australian market’. Adani Australia similarly stated that Australia’s major insurers ‘have, through their respective climate policies, announced a withdrawal from underwriting the thermal coal industry.’ Adani Australia stated that this was due to ‘a global divestment push led by European insurance companies’.
3.76
Examples of insurance services that had been refused that were put forward by Adani Australia included:
Refusal to underwrite risk associated with coal mining or specifically Adani
Imposition of a dramatic increase in premiums on existing policies
Refusal to renew existing policies
Refusal to provide services as an insurance broker.
3.77
The QRC outlined similar experiences of its members, and that difficulties in securing insurance was limiting business opportunities:
METS companies have also reported structural difficulty in securing insurance in several key areas including private indemnity. QRC understands that the process to renew an annual insurance policy must now commence three to four months before the policy expires. Many firms are facing trade-offs between skyrocketing premiums and higher excess limits on claims. In other cases, some firms have not been able to secure insurance at all. For many METS companies, insufficient insurance cover precludes them from tendering for resource work.
3.78
The RIN provided an example of FIELD Engineers, a company based in regional Queensland, whose costs for personal indemnity insurance was ‘18 times higher now than it was six years ago.’ In addition, this company advised that its insurer had placed ‘an arbitrary cap … on a proportion of a business's income that can be derived from working for thermal coal companies.’ FIELD Engineers was unwilling to name the insurer in question, due to concerns the insurer would withdraw its services.
3.79
BMD Constructions outlined its own difficulties in securing insurance for two of its projects for a client in the coal mining industry:
… our insurance broker reported, having approached 33 underwriters across the pre-eminent insurance market about public liability insurance, that they were unable to provide policies to support those two projects. They were declined specifically as a result of our client and/or because projects were related to the coal industry. In the area of environmental protection, we received a similar response from ten underwriters who declined to provide cover. In the case of director and officer insurance, our insurer stated that it would no longer respond to claims associated with those projects and reduced our coverage by half.
3.80
BMD Constructions added that this highlighted ‘a significant inconsistency between the position adopted by the insurance industry and by the Australian Government in lawfully approving infrastructure projects’.
3.81
Picnic Labs outlined the potential consequences for Australia’s exports, economic activity, and rural and regional communities if access to insurance was withdrawn from the resources industry:
This withdrawal of insurance capacity … will hinder economic activity and growth and potentially cripple Australia’s export industries. Even businesses which have been successfully operating for many years may be faced with unacceptable risks and potentially severe financial outcomes should an uninsured loss occur. New projects simply can’t commence without the necessary insurances in place. The consequent impact for regional and rural economies and communities that rely on Australia’s export industries may be significant even if these businesses are unable to commence or continue their activities due to an uninsured event.
Considerations for insurers
3.82
The Insurance Council of Australia (ICA) stated that ‘insurers are experts at managing risk.’ The ICA further outlined how risk is considered in relation to insurance:
Insurance products are highly complex products that require in depth understanding of the nature of the risk, the probability of the risk involved occurring, the likely loss that would be experienced, and the financial and regulatory factors that may affect the provision of insurance in the economy.
3.83
The ICA further outlined that ‘there is growing recognition that climate change and climate-related risks are a source of financial risk.’ To illustrate, the ICA pointed to ‘an increasing global regulatory focus on the management of climate risks and opportunities by prudential regulators both domestically and abroad’ (including APRA and ASIC); and expectations from major investor groups that climate change be treated as a financial risk.
3.84
The Australian Council of Superannuation Investors expressed similar sentiments and pointed to climate-related considerations of both domestic and international insurers:
The experts in risk, insurance companies, have already assessed that failing to transition away from fossil fuels is not a tolerable risk. The world’s largest re-insurance company, Swiss Re, recently announced that it would completely phase out thermal coal from its reinsurance in OECD countries by 2030. In Australia, insurers such as Suncorp and Insurance Australia Group are subject to the impact of increased climate-related insurance claims, which could cause insurance premiums to soar in the not-too-distant future, and leave many properties and businesses uninsurable.
3.85
The risks that climate change presented to the insurance industry were outlined by the ICA as including:
1
Changing physical risk, extreme weather patterns, and the need for new tools, modelling and investment to inform decision making, climate adaptation and mitigation
2
The continued need for suitable and affordable insurance products to protect the community and businesses against perils
3
A changing economy and the transition to a low carbon emissions economy, and
4
The need to ensure the solvency and stability of prudentially regulated entities.
3.86
The ICA pointed to a number of factors which contributed to increasing insurance costs for the resources sector. These included pressure on insurer profits due to more money being paid out than being collected in premiums overall; increasing reinsurance pricing globally (which impacts on local premiums); financial risks related to climate, and individual insurer decisions. The ICA summarised:
… it's where it comes together—the risk of reinsurance costs continuing to increase and the issue of meeting regulatory guidance around understanding financial risk exposure to climate, combined with a number of other factors, including just your board's policies and views on what segments of the market they want to play in.
3.87
The ICA added that many insurers had placed transition requirements on the thermal coal industry:
The fossil fuel industry, obviously, is one that is apparent in the climate policies of the majority of our members as they look at the transition to 2050 in line with the Paris Agreement. Certainly the thermal coal industry, most particularly, is the one industry that has specific transition requirements placed on it by many of our members at this point in time.
3.88
Due to a range of factors putting pressure on prices, the ICA cautioned that there was ‘no single silver bullet for resolving these issues’, but that it was ‘serious about grappling with them for the benefit of small business and the broader economy.’
3.89
DISER advised it was working with insurance stakeholders to ‘better understand the challenges faced by the insurance industry and businesses trying to access their products.’
3.90
APRA acknowledged that insurance affordability and availability was an issue, and that it would be looking at it more closely:
… we are very conscious of issues around particularly insurance affordability and availability. … we have … highlighted that issue as one on which we need to contribute to broader government initiatives to try and help the community, not just in northern Australia but increasingly in other parts of Australia, make sure that there is access to affordable insurance, which we know is an increasing problem and we recognise we can probably help with. We won't necessarily be able to solve it but we have identified it as work that we need to contribute to.
Insurance mutuals
3.91
APRA outlined that insurance mutuals ‘are used in a range of industries to assist in managing the cost and availability of insurance.’ APRA pointed to the two types of mutual pools, and stated that both ‘are currently possible under the existing legislative and regulatory framework’:
1
A licensed insurer that is mutually owned by relevant policyholders. In this case, the insurer is effectively issuing a guarantee of payment in the event of a valid claim and would therefore need to be authorised by APRA with requirements to hold very high-quality capital given the strength of the promise to policyholders.
2
A discretionary mutual pool that is not authorised by APRA. In this case payment of claims is ultimately discretionary (not guaranteed). There is more flexibility on capital in these circumstances.
3.92
The ICA stated that setting up mutual funds for insurance could be investigated in a situation where ‘all commercial solutions are exhausted.’ Picnic Labs also saw a solution to insurance challenges for the resources industry to be through the use of an insurance mutual:
An insurance mutual, a company limited by guarantee where the policyholder members are owners, can give the organisations that are vital to Australia’s export industries an opportunity to continue to access affordable insurance at reasonable terms.
3.93
To facilitate this, Picnic Labs recommended the amendment of prudential standards to ‘formally recognise Mutual Capital Instruments (MCIs)’ and to ‘allow 100 per cent of MCIs to be included in the definition of Common Equity Tier 1.’
3.94
APRA explained that the current limits on the use of mutual equity instruments in the definition of Common Equity Tier 1 capital aimed to:
… strike an appropriate balance between enhancing capital management flexibility for mutual organisations, and preventing overreliance on mutual equity instruments.
3.95
At the same time, APRA advised that it is ‘able to work with general insurers on a case-by-case basis to consider the merits of mutual equity instruments as a form of capital.’
Role of Government in increasing access to financial services
3.96
A number of submitters put forward recommendations regarding an increased role for Government in ensuring access to financial services for law abiding companies and industries. A ‘national interest test’ that would require banks, insurance companies and regulators to act in the national interest was recommended by Adani Australia and Whitehaven Coal. Such a test would capture the economic, employment and social impacts of decisions. Whitehaven Coal further recommended that ‘the taxpayer funded federal government's bank deposit guarantee … could be linked to the banks' willingness to support the Australian economy, in particular our export industries.’
3.97
Adani Australia also recommended that banks and insurance companies should be prohibited or restricted from ‘withdrawing from an entire industry’ instead of working with companies on an individual basis. The Hon Ron Boswell AO similarly considered that a ‘fair service rule' be introduced and that:
Banks and insurance companies must offer finance to all legitimate and credit worthy businesses in the Australian economy. The only reason legitimate businesses should be refused ‘fair service’ of finance or service is if they are unable to [meet] its financial commitments. The Australian Government must decide what business is legitimate, and not leave it to foreign owned corporations.
3.98
This was echoed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), which recommended that it or another appropriate entity be:
… empowered to require an institution to ‘show cause’ for a decision to withdraw or deny a financial service to a small business. Consideration should also be given as to whether this might then be published and whether a review could be undertaken by the Australian Financial Complaints Authority of the decision.
3.99
Mr Boswell further recommended that the ‘refusal’ of banks and insurers to service coal and supplier businesses ‘should be referred to the Australian Competition and Consumer Commission (ACCC) for its consideration as to whether this matter contravenes Section 45 of the Concerted [Practices] provisions.’ If it was not in contravention, Mr Boswell recommended that the provisions be ‘amended to prohibit banks from engaging in practices which have the purpose or effect of denying credit and other financial services to the coal industry.’
3.100
In response to this suggestion, the ACCC stated:
In terms of concerted practices … I'm not sure whether they're well suited to dealing with the type of issues that we've been talking about. While it appears quite a broad provision under the legislation, it does require that further threshold of substantial lessening and competition. It really is focused on, again, levels of cooperation that remove what would otherwise be competitive rivalry in the marketplace.
3.101
Whitehaven Coal put forward options to promote transparency that the government could consider:
Directing the banks to prepare a regulatory impact statement (or similar) that outlines the real impacts of a policy setting, such as job losses, economic loss, industry feedback and consultation undertaken, before they withdraw funding from any export project;
Directing the banks to clearly outline how their policies align with or differ from existing government policies;
Ensuring shareholders are consulted ahead of these decisions through a formal recommendation that outlines the rationale for the decision, the impact on the banks’ balance sheet and the regional economic impacts; and
Specifying a formal notification period – to be determined but that allows sufficient time for consultation, for instance 90 days – ahead of these decisions to ensure all affected stakeholders are informed, and a process is established whereby solutions may be reached that avoid the extreme action of withdrawing funding for projects.
3.102
CMAX Advisory saw a role for the government in alleviating financial service provision issues through ‘direct engagement with financial providers to explain the strategic importance of exporting industries.’
3.103
Having observed the resource sector’s challenges in accessing financial services and concerned similar issues could impact the red meat sector, the Red Meat Advisory Council (RMAC) considered that the Government should take steps to ‘guarantee access to financial services for law-abiding businesses.’ Specifically, RMAC recommended that the Australian Government cease dealings with financial services that don’t support law abiding businesses; issue a statement of intent to be a provider of last resort in the instance of market failure; and annually review financial service providers who are reported to have refused services.
3.104
Wellard expressed similar concern regarding access to financial services for the live export sector and recommended that ‘in return for government support’, a ‘Universal Service Obligation’ be applied to authorised deposit taking institutions, ensuring that they provide a minimum level of service to Australian individuals and law abiding businesses. Wellard added that ‘this could be in the form of providing everyday banking facilities (deposits, credit cards)’ and did not mean that banks would be forced to extend credit to businesses with high credit risk.
3.105
In relation to insurance, BMD Constructions put forward two options to enable construction contractors to obtain insurance for projects relating to the resources industry:
1
The Clients and Principals absorb these risks to the extent that the contractor is effectively indemnified from risks for which it cannot insure against;
2
Governments (either State or Federal) provide the necessary insurance from public funds to ensure the export industry is supported.
3.106
The ICA outlined how the government could support insurance in the resources sector if it wished to, noting the risk of making a loss:
On the pure question of risk, there probably would be a way that government could look at underwriting those types if they chose to. I think you'd want the government's actuary to come in and have a think about whether that would be a book that would make any money.
3.107
The ABA cautioned against banks being forced to lend to all businesses:
The central basis on which banks lend in this country is an assessment of the creditworthiness of the potential borrower, the borrower's ability to service the loan and the commercial viability of the business that the borrower is seeking the funds for. That is legally an expectation of all major investors and all regulators globally. If we were to move away from such a system, we would be a very serious global outlier, and the consequences of it, I think, should not be underestimated.
3.108
The ICA agreed and stated:
… it would be very dangerous to compel financial services sectors to provide insurance or lending or anything else to certain sectors over and above all the other factors they need to take into consideration, including the prudential guidance, the appetite for those investors providing the capital from overseas and even just in line with current market circumstances where in in terms of insurance. It sounds like an easy fix, but I think it's far more complicated and could have deeper ramifications if it was applied too simplistically.
3.109
The Ethical Advisers Co-op and Ethical Choice Investments also cautioned against forcing financial institutions to invest in all industries, as this could compel banks and insurers to ‘support bad companies’ and would risk distorting markets, weakening financial institutions and ultimately posing ‘a risk to our economy.’
3.110
NAB considered that it was ‘really important that a bank has the ability to choose who it lends to, what industries it lends to, and understands that in the context of its portfolio.’ Similarly, Treasury stated that ‘regulatory approaches that restrict private lending decisions can distort the efficient allocation of resources in the economy.’
3.111
In response to calls that the ‘government’s bank deposit guarantee’ be linked to banks’ support for export industries, Treasury clarified that ‘the guarantee of the Financial Claims Scheme is not a guarantee to banks; it is a means to support the positives in those unusual circumstances in which a bank might not be able to meet those deposits’, such as during the Global Financial Crisis. As such, Treasury considered that linking the Scheme to other measures could risk ‘undermining that financial stability objective, which could have unintended consequences in the financial system.’
3.112
The Centre for Policy Development similarly pointed out that banks ‘already have requirements placed on them’ in exchange for deposit guarantees, which includes having ‘good prudential risk management.’ In light of this the CPD stated:
It's actually those prudential requirements that make it safe for the taxpayer to guarantee those banks, so, if the banks are told or instructed to make different risk assessments to those that they would normally make, it would almost undermine the purpose of the prudential regulatory frameworks. Certainly it has implications both for raising the global capital and for the global competitiveness and standing of our financial industry, but it also has implications for the prudential management and governance of the financial sector.
Activist pressure
3.113
The New South Wales (NSW) Minerals Council stated that ‘the policies of financial institutions [regarding fossil fuel based investments] have largely been developed in response to the pressure of activist groups and shareholders promoting a rapid phase out of fossil fuels.’ Port Waratah Coal Services further outlined how some interest groups had influenced decision making in the financial services sector:
Recently, interest groups opposed to the coal industry have successfully prosecuted arguments (through Annual General Meetings and investor activism) for Australia to rush to exit coal. These forces have pushed banks, insurers and several large equity investors (for example, superfunds) to pressure Australian corporates to lead the rush, without any due consideration of an orderly transition in global energy markets. The result is likely to have a negative impact on industry through reduced access to debt finance, insurance capacity and equity capital, and consequentially a negative impact on the competitiveness and ultimately the contribution of this industry to the economy.
3.114
The MCA similarly outlined:
Over the past decade, the Australian mining sector has been subjected to an increasingly sophisticated campaign to disrupt investment flows into key areas … Combined with a heightened focus on ESG issues, a consequence of the campaign has been the increasing reluctance of financial institutions and insurance companies to support the resources sector. More than just mining companies, many small to medium sized contractors and suppliers in transport, maintenance and logistics operating in regional Australia have been subject to an increasing lack of access to financial services and insurance.
3.115
Whitehaven Coal added that ‘while the banks have so far been the most responsive’ to pressure from activists, superannuation and insurance industries were also ‘facing increasing pressure from activist campaigns.’
3.116
The Bloomfield Group explained that ‘concerted campaigns by climate activist groups’ had led insurance cover for the coal industry to become ‘prohibitively expensive if it can be obtained at all.’ New Hope Group raised a similar example:
In recent years, a number of insurance companies have become reluctant to insure businesses in the coal industry due to concerted campaigns by activist groups. This is particularly evident in the case of the Carmichael Mine in Queensland where activists have engaged in promoting illegal secondary boycotts of any business looking to provide products or services to the project.
3.117
Whitehaven Coal considered that there was a:
… need for greater scrutiny of climate change lobbying that is unwilling to account for the complex web of economic, social, political and other considerations, while having a materially negative influence over the investment decisions of our banks and financial institutions.
3.118
Whitehaven Coal also urged the Committee to consider ‘whether the Parliament should act to ensure greater accountability and transparency’ around the influence of activism, ‘or raise thresholds to limit its impact.’
3.119
Mr John Cochrane highlighted that:
There's an agency problem in shareholding—that very loud minority shareholders can have an outsized influence. The second one is, with many shares of course held by funds, how the funds are going to vote their shares. They don't send out surveys to all their holders about how they're going to vote their shares. They outsource that as well to advisory services. So a few small shareholders can have a large effect on these core kinds of corporate governance issues.
3.120
Mr Cochrane outlined potential options to limit the influence of minority shareholders on large financial institutions. He agreed that there could be a role for the government in this regard, and that it was also something he hoped ‘to see market solutions to’:
For example, greater use of non-voting shares would help, so that large indexed funds are not sitting on voting shares that they don't know how to vote and people can buy the influence that they want to have.
3.121
The ACCC confirmed that, while they are aware of issues around investor activism influencing companies’ decisions, it has not been an area they have actively investigated to date:
Certainly, investor activism comes up as we talk to boards. They're very conscious of the issues that they face, and they've got a range of competing stakeholders that they are trying to take into account in their decision-making. They've obviously got shareholders who want to make sure that they're a profitable and high return company; they've got customers who are looking for service; they've got staff who are obviously interested in the way that their employers are taking these issues into account; and they've got broader investors who are having increasing interest in the way these risks are being managed. Is it a specific issue that we have looked at? No, I can't say it is. Is it an issue that's come up in our discussions with boards on the sorts of things that are influencing their decision-making? Yes, it is.
Impact of activism on other industries
3.122
The MCA explained how activist tactics were being used beyond the coal industry:
It's not limited to coal. These campaigns are being seen in natural gas, agriculture and even in the airlines. Overseas, recently in the United States, we're already seeing signs of similar campaigns being directed at new, critical minerals developments that will underpin low emissions technologies.
3.123
The Australian Petroleum Production and Exploration Association (APPEA) outlined how the oil and gas industry had been subject to ‘growing activism’, through protest movements and shareholder activism. APPEA outlined the impact of this on the resources sector:
This has begun to have a significant impact on the ability of companies to raise capital—both debt and equity—across the resources industry. … As the relatively small pool of Australian finance operators has reduced in the face of ESG activism and advisers, this activity—the raising of capital, whether debt or equity—has become more difficult. This is particularly the case for many smaller companies, whose ability to raise finance is directly correlated to their ability to undertake exploration and then production activities.
3.124
The Australian Workers’ Union also highlighted that the gas sector had been ‘particularly targeted by shareholder activism’, and further advised:
… some shareholder activism is undertaken with a goal of stopping projects altogether. This ignores the complex and multifaceted ways that gas projects benefit workers, the Australian economy and the global transition to lower emissions.
3.125
The defence industry was facing ideological objections from some financial institutions, according to CMAX Advisory:
… while financial institutions may elect to divest or refuse products and services to the defence businesses, this is based on an ideological objection to the industry, rather than an assessment of longer-term profitability or the necessity of a secure Australia for a prosperous economy.
3.126
An example from the agriculture industry was provided by RMAC, who stated that pressure was being put on financial institutions to withdraw from some sectors of the red meat industry, and that ‘this had been largely driven by the animal activists.’ The Australian Livestock Exporters Council (ALEC) similarly advised that its members had reported being unable to ‘access finance, insurance and in many cases even a holding account’, due to financial institutions stating that ‘they do not deal with the livestock export industry.’ ALEC continued:
… this is a direct outcome of an activist agenda that is utilising the ESG investment trend as a vehicle to drive these policies. Generally, the advice that we have seen that informs these ESG investments are misinformed and developed without the input of industry. There is a need for greater transparency around how these decisions are made and, indeed, accountability for the advice that is given.
3.127
ALEC further pointed to investment advisory firms that had released advice against investing in livestock companies. ALEC stated that:
Providers of deliberate misinformation or even poorly researched advice must be held accountable. Failure to do so allows lending institutions to become moral arbiters and effectively place proxy bans on what are legal and highly ethical businesses – which is of course the objective of these activist groups.
3.128
Wellard, a livestock exporter, outlined the challenges it had in accessing financial services, which it considered were the result of activist pressure. Wellard stated that its bank had refused to continue extending financial services for its operations. Wellard argued that, while it had been ‘experiencing some financial difficulties at the time’, the bank’s refusal was ‘based on the type of industry in which Wellard operates’. In addition, Wellard stated that it was unable to secure financial services from other banks and ‘the refusal was based on each bank’s credit committee and policy settings, which specifically exclude live export.’
3.129
World Animal Protection offered a different perspective:
It is crucial that the public still have an opportunity to influence the direction of animal welfare in this country by choosing to invest in ethical banking institutions. Any efforts to limit the ability of financial institutions to make decisions that reflect public sentiment and growing scientific consensus on issues like animal welfare would likely only further reduce public confidence in both the agriculture sector and the financial industry more broadly.
3.130
Wellard considered that activists, by seeking to influence financial institutions, were ‘effectively engaging in secondary boycott conduct, which is prohibited under section 45D of the Competition and Consumer Act 2010’. As such, Wellard recommended that the ACCC give greater attention to this issue, including through greater legislative powers if required.
3.131
In relation to whether banks offer transactional services to the live export sector, the CBA advised that it had ‘the ability to deal with live export’, and that the ‘thing we care about in our policy is around animal welfare and an expectation from our clients to be managing animal welfare appropriately.’
3.132
Adani Australia recommended that activist groups be subject to greater transparency in relation to their sources of funding:
… the adverse behaviour by banks and insurance companies are, in part, a direct result of the pressure they receive from foreign funded, anti-fossil-fuel activist groups that enjoy, somewhat perversely, charitable tax deductibility status. … We submit there must be greater transparency applied to these political organisations masquerading as environmental charities, with a requirement that they provide details of their source of foreign funding.
3.133
In response to these concerns, the ABA emphasised that Australian banks’ consideration of climate risk was not the product of activism:
This is not about a few activists or troublemakers at Annual General Meetings … this is about some of the biggest investment and fund managers on the planet. They too recognise the financial risk of a changing climate and are moving with or without Australia. … The bottom line is: the banks … are in the business of lending. They don't make their decisions based on a whim or a fad; instead, they weigh up the full gamut of risks and opportunities, the commercial considerations of every business seeking a loan, and they do all of this in accordance with the requirements and expectations of regulators, governments and investors, here in Australia and globally.
3.134
Ethical Choice Investments agreed and stated:
‘Activists’ are not driving the difficulties a small number of industries claim to have in receiving lending, insurance, and investments. Increasing risks, global economic changes and greater awareness of overall downsides for communities and profits are behind the recent tightening of access to financial services for a few industries.
3.135
The Australian Council of Superannuation Investors similarly expressed that investment decisions that incorporate climate-related financial risks should not ‘be considered the work of woke activists.’ Instead, ACSI attributed this to ‘managing financial risk in portfolios’.
3.136
In a similar vein, Ethical Partners pointed out that trillions of dollars of investment was subject to consideration of ESG risks:
… the consideration of the financial risks of ESG in investments is not a minority activist approach; instead it is a global investor response that includes the biggest investors in almost all countries globally. For example, there's at least $103 trillion under the Principles for Responsible Investment that have committed to consider ESG risk in their financial analysis.
3.137
APRA stated that investor activism had come up in its discussions with boards as one issue that was ‘influencing their decision making.’ In terms of whether it was an issue that APRA or the government should look at, APRA advised:
… if we thought there was a problem I think we, at least in terms of the financial system, have the capacity to respond to that if need be. The government may of course choose to do something. It's the prerogative of governments and parliaments if they want to do something. But I'm not sure, at least within our mandate, that the risk is a significant one that would require intervention just at the moment.
3.138
In considering the influence of activist investors on banks and insurers, the RBA stated that ‘there are more activist investors at this stage’, but that they ‘by and large, contribute a small share of the ownership of the banks and insurers.’ The RBA considered that a ‘more significant’ factor for banks and insurers was:
… the extent that they're raising funds in wholesale capital markets globally, and we certainly are seeing that very large investors are much more aware of the ESG considerations, and that is starting to be a more prominent consideration in their investment decisions. The ability of the Australian banks to raise funds internationally in wholesale capital markets contributes significantly to the cost of their funding and so, therefore, to the costs that they're able to lend to domestic households and businesses. So there are strong reasons for the Australian banks to consider the interests of international investors because, ultimately, they are providing some of the funding that is going through to domestic households and businesses.
Committee comment
3.139
Finance and insurance is vital to the successful running of any business. This is particularly the case for Australia’s export industries such as the resources sector, which is highly capital intensive. The Committee was concerned to hear so many reports from thermal coal companies, and other businesses that provide services to the resources sector, that they are facing increased difficulty in securing access to these services.
3.140
In particular, the Committee was concerned to hear that businesses in the coal and coal-adjacent sectors considered that banks and insurers were not working with them on an individual basis and were instead applying a ‘blanket ban’ to their industry. On the other hand, the Committee received evidence that financial institutions have set clear and transparent targets regarding their commitment to net zero emissions by 2050, and that banks have been working closely with their highest emitting customers. These conflicting accounts indicate there is more that can be done to reach a shared understanding, through collaboration and transparency, between these two industries.
3.141
The effect that the withdrawal of financial services is having on the economy is that highly profitable companies are increasingly becoming unable to obtain finance and insurance for highly profitable – and legal – projects. This also means that financial institutions are not maximising their potential profits. Therefore, activist investors, and financial institutions’ failure to properly manage risk is having a chilling effect on the growth of the Australian economy which can have a number of unintended consequences. This means that the directors of banks and other financial institutions are in breach of their fiduciary duty to disclose the risk of investor activism. In the Committee’s view this is occurring because directors are fearful of the two-strike rule and are looking to make their life easier by not risking the wrath of activist investors voting down their AGMs. Evidence was to be obtained on this matter, however the hearing schedule was cut short.
3.142
The Committee has also heard evidence that there is an asymmetry of power between international investors and Australian investors. This imbalance of power has resulted in some companies acting more in the interests of international investors than Australian investors. This behaviour is putting directors at risk of breaching their duties of ensuring they are maximising the returns to their shareholders as these international investors are pushing institutions away from investing in profitable resource industries. Therefore, from the evidence provided to the Committee we see that international investors who may not be interested in the performance of the Australian economy are having an undue influence on Australian companies.
3.143
Even more troubling to the Committee was a reluctance by some export businesses to provide evidence to the inquiry (even on a confidential basis), for fear of reprisal from financial institutions. This suggests the lack of availability and affordability of financial services may be more widespread than evidence to this inquiry indicates. Concerted efforts by governments to confidentially engage key export sectors, including resources and livestock, will go further to determine the extent of this issue.
3.144
The Committee heard a range of recommendations as to how the government could ensure continued access to finance and insurance for Australia’s export sectors. In particular, some recommended that banks and insurers be required to finance and insure all law-abiding businesses, and that evidence be shown if financial services are withdrawn. Others suggested that the government could be a provider of last resort, to ensure these industries are able to continue to operate. The Committee also heard the concerns of some stakeholders regarding recommendations that would force banks and insurers to lend to all industries, as this may undermine the stability and robustness of Australia’s financial system.
3.145
The Committee was informed by both ASIC and APRA in their testimony that neither of them were actively investigating or making themselves aware of the effect that shareholder activism and proxy advisers are having on companies and their investment decisions. ASIC should not be waiting to hear the evidence that this is occurring, they should be going out and actively investigating the issue. In this regard APRA and ASIC are failing in their duties as regulators.
3.146
The Committee acknowledges that financial institutions must account for climate change-related financial risks in their decision making. This approach is being taken by markets and regulators around the world and Australia’s financial institutions are reflecting this global shift. If banks and insurers did not take this approach and effectively manage climate-related risks, it could lead to instability across the financial system.
3.147
This does not mean, however, that financial institutions need to abandon entire industries. Industries such as resources and agriculture will play a role in the transition to a lower emissions future, particularly through innovations in technology related to emissions reduction. Further to this, these industries account for a large percentage of Australia’s exports and sudden withdrawal of financial support for them will have serious flow on effects for Australia’s economy. The Committee urges financial institutions to work with these vital export industries to facilitate their contribution to Australia’s economic future.
3.148
It follows that any changes to prudential standards in relation to climate change risk should similarly consider the impact that they may have on Australia’s economy. As such, the Committee thinks it important that any further changes in this regard be made in consultation with the resources industry. This will promote a shared understanding among all parties and ensure the full range of risks and impacts are considered.
3.149
The Committee heard that mutual insurance funds could provide greater access to insurance for the resources export sector. Changes to prudential standards to allow for increased use of mutual funds may facilitate this process.
3.150
Many stakeholders from the resources industry pointed to the influence of activism, protests, and sustained campaigns against the sector as a major factor influencing the decisions of banks, insurers, superannuation funds and investors. Some inquiry participants concluded that these financial and investment institutions were consequently not making decisions purely on a risk management basis, but were succumbing to public pressure to withdraw from the resources sector.
3.151
At the same time, the Committee heard from others that the influence of activists was not a major driving force behind the decisions of banks and insurers, who were more focused on the expectations and requirements of international funders and investors, regulators, shareholders and clients. The Committee acknowledges the range of views on the issue of shareholder activism and as such considers that further investigation of this issue is warranted.
Recommendations
3.152
The Committee recommends that the Australian Prudential Regulation Authority consult the resources sector in the context of any future changes to prudential guidance on climate change risk, to ensure the full impact of the changes on this sector are understood and accounted for.
3.153
The Committee recommends that the Australian Government recognise that finance, banking and insurance services are essential services for businesses.
3.154
The Committee recommends that the Australian Government take steps to ensure that banks must, at a minimum, provide transactional banking services to all law-abiding businesses.
3.155
The Committee recommends that the Australian Government direct the banks to prepare a regulatory impact statement (or similar) that outlines the real impacts of a policy setting – particularly on regional Australia – such as job losses and economic impacts, and detailing industry feedback received and consultation undertaken, before withdrawing funding from any export project.
3.156
The Committee recommends that the Australian Government consider introducing new laws or regulations that ensure shareholders are consulted ahead of decisions by banks and other financial organisations to withdraw funding from export-focused projects, through a formal recommendation that outlines the rationale for the decision, the impact on the bank’s balance sheet and the regional economic impacts. These new laws or regulations should specify a formal notification period – to be determined but that allows sufficient time for consultation, for instance 90 days – ahead of these decisions to ensure all affected stakeholders are informed.
3.157
The Committee recommends that the Australian Government work with the resources sector to create a self-funding insurance model that meets the needs of resource companies, contractors, suppliers and associated export infrastructure.
3.158
The Committee recommends that the Department of the Treasury conduct a review into extent of the influence of activist pressure on the decisions of financial institutions in relation to the resources industry, and if necessary develop options to address this issue.
3.159
The Committee recommends that both APRA and ASIC should undertake a broad review of what types of risks they are investigating:
The risk of international investors should be included in this review
The risk of proxy advisors and their effects on the stability of the economy should be included
The unintended consequences of these risks.
3.160
The Committee recommends that the Australian Government consider a review into the effects of proxy advisers, their influence on boards and the risks they place on the stability of the Australian financial system and/or Australian listed companies. In addition to the reforms the Australian Government has issued for consultation, the Australian Government should assess any wider unintended consequences that may occur from proxy advisers.