Katta O’Donnell, an Australian student, has filed the world-first climate change case against the Australian government. She is suing the government for failing to disclose the threat of climate change to investors in sovereign bonds.
A sovereign bond is where investors lend money to the government. Just like other bonds, the government promised to repay the money in the future, as well as interest in the meantime. They are perceived as the “safest form of investment” according to experts.
O’Donnell argues Australia’s inadequate climate change policies, “ranked among the lowest in the industrialised world”, posed a threat to the economy. Hence, this is why she proclaims that the government should disclose information documents to sovereign bond investors regarding the climate-related risks.
By concealing this information, the federal government breaches its legal duty. It claims that the government has engaged in “misleading and deceptive conduct”, and government officials breached their “duty of care and diligence”.
A report from leading barristers demonstrated that government officials who fail to disclose information about the climate risk could be found responsible for breaching their duty of care and diligence.
What is the lawsuit?
A statement filed with the Federal Court of Australia in Victoria state claims that “Australia is materially exposed and susceptible” to threat posed by climate change. It alleges that Australia’s economy will be remarkably affected by how the government deals with climate change. Therefore, the investors should be entitled to know those risks as it can significantly affect an investor’s decision to buy sovereign bonds.
O’Donnell is declaring that the Australian government should disclose the inadequate climate change policies to investors and “injunction pausing further promotion of such bonds until it complies” according to BBC news.
How do climate risks pose a threat to sovereign bond?
The risks to the economy recognized by the Taskforce on Climate-related Financial Disclosures (TCFD) are listed below.
The vulnerability and susceptibility to the impacts of climate change. Key findings from climate council report have stated that “Climate change is a major threat to Australia’s financial stability, and poses substantial systemic economic risks. Direct macroeconomic shocks from climate change, including reduced agricultural yields, damage to property and infrastructure and commodity price hikes, are likely to lead to painful market corrections and could trigger serious financial instability in Australia and the region.”
The Federal Government’s current approach to climate change finds that the damage in monetary terms to Australia’s agricultural sector will be remarkable. According to a report by climate council, “Australia’s greenhouse gas emissions have been rising for four years and we are not on track to meet our weak 2030 emissions reduction target. If the world followed Australia’s approach we would be on track for at least 3-4°C of global warming, which would have catastrophic economic consequences.”
The climate-related risk that poses to sovereign bonds are listed below:
The Government’s response to climate change can affect Australia’s financial position. For example, Australia’s GDP could be affected by bushfires or droughts.
The climate-related accident could cause the Australian dollar to fluctuate, as well as putting Australia’s AAA credit rating at risk.
The risks combine to form a material sovereign risk to sovereign debt. Consequently, climate change risks are crucial to an investor's decision on whether or not to trade in government bonds, which is why investors should be entitled to be informed of those risks.
The effects of this case on the government’s action to improve the effectiveness of Australia’s climate policies remains to be seen.