Sovereign bond risk: the climate punch

This week, a triple A-rated federal government was forced to acknowledge the potential risks of climate change on the value of sovereign bonds as it settled a landmark case that alleged it had misled or deceived investors.

The Federal Court judge involved said global warming would likely be “a huge drain on (government) resources.”

It is the first, and only, legal action in the world that seeks to hold a sovereign nation accountable for not disclosing the risks of climate change to sovereign bond investors. 

However, it may not be the last. 

The class action, launched in 2020 by a young Australian university student, made the following allegations:

1. Physical and transition risks from climate change are material risks for bond holders;

2. Transition risks will be exacerbated the longer the country (in this case Australia) takes to commit to a net zero emissions target and the longer it takes to implement effective measures to reach net zero;

3. Not disclosing climate change risks to bond investors is misleading or deceptive in law (12DA of the Australian Securities and Investments Commission Act 2001 (Cth)).

The result? The Australian government chose to settle rather than proceed to court.
As part of the settlement, it has now published a statement on a Treasury website acknowledging that climate change was a systemic risk that may affect bond value.