Executives from the big four banks appeared before the joint standing committee on trade and investment growth for a parliamentary hearing last week, facing questions around their commitments to exiting thermal coal by 2030.
The committee, chaired by the Minister for Resources, Water and Northern Australia, Keith Pitt, was initiated last year, aiming to scrutinise investment in and the treatment of export industries, including resources and agricultures, by banks, insurers and superannuation funds.
Mr Pitt put forward an idea of legislating that banks could not withdraw from a sector because of environmental, social and governance (ESG) concerns – pointing to an example of thermal coal.
“Wouldn’t it be better for you to go off to your institutional investors – international, domestic or otherwise – and tell them: ‘Look, we know you’ve got concerns. But it’s the law. We can’t do that,’” Mr Pitt asked.
“‘We can’t withdraw. It doesn’t matter how much pressure you put on us; we’re not able to exit from this sector.’ The sector’s profitable, so wouldn’t it be better for you?”
David Gall, group executive for corporate and institutional banking at NAB, commented that legislators would have to be “very careful” and there could be “unintended” consequences if they mandated that banks could not exit a sector.
“I think there are a whole range of factors that a government would need to consider in going down that path,” Mr Gall told the committee.
“I think there is real merit in having an efficient marketplace where the benefit for the Australian banks in being able to access all markets and weigh up these decisions is hopefully improving both our access to funds and ultimately, cost to funds. That’s going to translate to a benefit to Australian business and to Australians full stop in terms of the cost of borrowing etc.”
Westpac chief financial officer Michael Rowland echoed Mr Gall, commenting the big four each raise around $30 billion a year, with a reliance on foreign funders.
Foreign institutional investors also make up sizeable chunks of their shareholder bases, taking up around 25 per cent and 24 per cent for NAB and Westpac respectively.
As such, further pressure to embed climate risk into banks’ strategies has come from investors such as asset management giant BlackRock, after its chief executive Larry Fink wrote a letter to all major CEOS, including the big four bosses.
The letter “set out the clear expectation that capital is very mobile and that, unless the major Australian corporations had a long-term strategy that included how we manage climate risk, then certainly BlackRock would reconsider how it reallocates the capital,” Mr Rowland said.
“And from a Westpac point of view, BlackRock is a major shareholder of Westpac.”
Mr Pitt fired back: “That’s an interesting answer, because it indicates to me that you’re putting the wishes of your investors ahead of the needs of your customers.”
But Mr Rowland refuted the minister’s claim.
“I’m just saying that Australian banks are reliant on overseas capital markets and our institutional investors, so they’re an important source of funding,” he said.
“Without equity and debt investors, it’s more difficult for us to lend to Australians. We say that our investors are marking it clearer to us, over time, their expectation that we have clear policies and frameworks around ESG.”
Mr Gall also noted that there has been more interest in NAB’s environmental, social and governance (ESG) policies from the bank’s investors, with inquiries around how it has tracked on its net zero by 2050 commitment.
Around 25 per cent of the bank’s investor meetings had a focus around ESG, he added, with questions around fossil fuel transition pathways and financing.
“Clearly, banks like NAB are reliant on offshore wholesale funding. Our task there is something in the order of $30 billion a year, and we need to tap globally into all markets, including the European market,” he said.
“There are clearly questions coming from many of those investors around our policies around ESG.”
CBA group executive for institutional banking and markets, Andrew Hinchliff, said that while he had not been in the investor equity meetings, he had a “suspicion it’s very much in line with NAB’s response”.
“If you go to Europe, the first questions you get on any bond issue over there are: ‘What is your position on fossil fuels? What is your position on climate change? Can we expect more green bond issuances out of the CBA?’” Mr Hinchliff said.
“Now, we think that path is accelerating around the world as more and more countries sign up to certain commitments. But it’s certainly front of mind for all of those issues.
“The risk for us is that funding dries up and capital dries up – not necessarily instantaneously, but over time you’d expect your cost of capital to be affected by that demand, and whether that is forthcoming to the CBA or not.”
Mark Whelan, group executive, institutional at ANZ on the other hand said the questioning from investors has become “more intense and specific”.
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Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth for InvestorDaily and ifa.