A world-first case, brought by a young law student, has forced the federal government to acknowledge its failure to declare the risks to the value of its debt as a result of climate change. By Katta O’Donnell.

Government settles climate bond lawsuit

A woman smiles outside the High Court.
Katta O’Donnell outside the High Court.
Credit: Supplied

We sit for tea and strip down to our T-shirts. It’s hot for this time of year. “How did your court case go, Katta?” my friend asks.

I hesitate, caught by the strangeness of the moment, trying to comprehend the time and place that I am in. Just being alive in this period of ecosystem collapse is crushing, let alone fighting the government.

Three years ago, with the help of Equity Generation lawyers, I sued the federal government. In my view, it was not fully disclosing the financial risk the climate crisis poses when it issued bonds – that is, raised money from the banks, institutions, super funds and retail investors that typically buy its debt.

All of us have some exposure to these financial instruments. They are currently deemed to be among the safest bonds in the world – Australia is one of only nine countries that hold the highest possible credit rating, from all three of the world’s leading credit agencies. Yet Australia is also the largest per capita polluter in the G20, based on the amount of coal it burns, according to recent figures from energy think tank Ember.

The changing climate, the most urgent crisis of our time, was being ignored in disclosure material related to Australia’s debt.

Last week, the case settled, with the government agreeing to acknowledge the “systemic risk” and the “significant risks” it may pose to Australia’s economy.

A systemic risk is so large and interconnected it can cause damage across domestic and potentially global markets – the collapse of the American investment bank Lehman Brothers that spurred the global financial crisis in 2008 is a famous example. We know the changes and disruptions from climate change will be so numerous and widespread it is harder to find things that will not be affected than to list the things that will.

The Treasury statement also notes: “Achieving Australia’s emissions reduction commitments and realising the opportunities that accompany the transition will require significant investment by governments and the private sector. Uncertainty around the magnitude and timing of the physical impacts of climate change and the global transition to net zero emissions translates to uncertainty about the fiscal impacts of climate change. And, as a consequence, there is uncertainty about whether the fiscal impacts of climate change may affect (if at all) the value of Commonwealth Government Securities.”

This is the first time a country with an AAA credit rating has acknowledged that climate change is a systemic risk that might affect the economy and, therefore, the value of its debt. If a country’s debt is considered less valuable, that increases the amount of interest investors will demand to hold it, and that pushes up the government’s debt service costs – an especially unwelcome development if it needs to borrow more in future, to pay for the physical and social infrastructure of the essential rapid transition to adapt to the effects of the climate crisis.

While this is not going to save the world, it’s a positive step, a moment of satisfaction. This is also the first time a court anywhere in the world has offered views about climate risks to sovereign bonds. In his decision approving the settlement, with no costs, the Federal Court’s Justice Bernard Murphy made some pointed comments, refuting the government’s contention that our team would not be able to prove the financial impact of climate change.

“I doubt that it will be as difficult as the Commonwealth submits to establish that global warming and climate change gives rise to real, systemic risks to the Commonwealth’s coffers and therefore to the value of the change traded government bonds,” the judgement said. “For the purposes of the application I take judicial notice of the fact that the consensus position of leading climate scientists around the world is that global warming and climate change brings risks of more frequent and more intense bushfires, storm surges, coastal flooding, inland flooding, cyclones, droughts and other extreme weather events.

“To my mind, it seems likely that such events will give rise to a huge drain on Commonwealth resources and on the tax base over a very lengthy period, perhaps forever, and therefore also weigh on forecasts in relation to the Commonwealth’s financial and economic position.”

Murphy traversed a bleak future: rising sea levels, storm surges, “more intense and more regular” fires, floods and droughts. He noted the likelihood that some areas would become effectively uninsurable and that the government may need to meet the cost. He described an apocalyptic vision that all too soon could be a reality. All of this, self-evidently, will harm the government’s bottom line.

The Treasury’s statement also included the line, “There is currently no internationally agreed framework for assessing any climate‑related risks and opportunities associated with sovereign debt instruments.” While this is the case, central banks around the world are increasingly focused on modelling the effects of global heating, in line with their duties to monitor risks to financial stability. The government’s latest Intergenerational Report was the first to attempt a reckoning with the costs of global heating to this country, including as much as $423 billion in lost labour productivity by 2063.

The evidence of the risks mounts day by day, around the world: floods, mass mortality events among animals, crop failures, poisoned water.

It’s mind-boggling, considering what is actually at stake, that this court case even had to happen. The government used taxpayer money to push back against having to tell the truth, just as it fought its responsibility to consider younger generations in the Sharma case. In March last year the Federal Court overturned the initial landmark ruling that the environment minister owed a duty of care to children in her consideration of whether to approve a major coalmine expansion. Instead of taking action on an unfolding crisis, these are the battles that those in positions of power chose to fight. Drastic change is needed because the crux of the issue is that the systemic risk to the economy is caused by the current economic system itself. It is reliant on extracting polluting resources from this continent and funding and supporting the known causes of this crisis.

A March report from The Australia Institute shows that in 2022-23, federal and state governments provided a total of $11.1 billion worth of spending and tax breaks for fossil fuel industries. Forward estimates over a three-year period predict this to increase to a record $57.1 billion, a figure 14 times greater than the balance of Australia’s Disaster Ready Fund, the report states.

It has been said it is easier to imagine the end of the world than to imagine the end of capitalism. It’s time to change that. Having an AAA-rated country admit bond values can be affected by climate change-related issues is a foundation for climate action not just in Australia but in other countries around the world. According to the International Monetary Fund, the world’s public debt is US$91 trillion, so the consequences can be far-reaching.

It would be wrong to think the success of this court case means the government is taking action on the climate crisis. The government acknowledges the risk of harm but continues to enable destructive behaviour. The United Nations has already declared that only a small window remains for the world to limit heating to manageable levels, and Australia’s emissions are still climbing.

Meanwhile, state governments are enacting more draconian laws against protesting. My brother was one of the first climate activists to be imprisoned in this country. He abseiled off a crane to highlight and halt the system that is causing the environment so much damage. He was one of many who participated in protests at the Newcastle coal port and Port Botany. I cannot tell you how terrible it feels to have a loved one, who has only ever fought for a better world, be locked in a cage. He was released on appeal, with the judge condemning the original decision.

It is a long and difficult road, because standing up to injustice hurts. However, the community that grows through such action is powerful. As my good friend Zoë Hulme-Peake wrote, “It takes all of us, it takes it all from us.”

This article was first published in the print edition of The Saturday Paper on October 21, 2023 as "Climate debt".

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