Reserve Bank of Australia deputy governor Guy Debelle called climate change "a first-order risk for the financial system", with broad-ranging impacts on Australia.
Debelle also warned while there has only been "isolated examples" of divestment from Australia because of climate risk, the likelihood of more significant divestment is increasing.
"Over recent years, climate risks have increasingly entered the discussion with foreign investors," Debelle said during a speech at the CFA Australia Investment Conference. "It almost invariably comes up in conversations I have with asset managers.
"In our liaison conversations with many Australian companies, they also tell us that climate comes up constantly in their discussions with their equity investors and bond holders."
This has implications for the cost and ease of access to capital for both Australian companies and Australian governments, Debelle said.
Debelle noted that the Council of Financial Regulators - comprising Treasury, the Australian Prudential Regulation Agency (APRA), the Australian Securities and Investments Commission (ASIC) and the RBA - is tackling these issues through the Working Group on the Financial Implications of Climate Change.
The working group is addressing several challenging, including the "quality, consistency, comparability and often the sheer availability of data to appropriately assess climate risks."
Debelle cited the Climate Vulnerability Assessment (CVA) currently being undertaken by APRA with the voluntary participation of the five largest Australian banks.
"Our expectation is that this exercise will provide useful data and methodology for other Australian financial institutions, particularly asset managers," Debelle said. "It should also help Australian companies with their disclosures of climate risks. In particular, it can serve as a focal point in terms of the scenarios used in the CVA, as well as providing a macroeconomic overlay that can be used by financial institutions and companies."
Debelle said that the CVA is not a "stress test" for banks' loan portfolios and "no implications for the amount of capital the banks need to hold against these risks at this stage."
Debelle also noted that investors will adjust their portfolios in response to climate risks and governments outside of Australia are implementing net zero policies.
"Both of these are effectively increasing the cost of emissions-intensive activities in Australia," Debelle said. "So, irrespective of whether we think these adjustments are appropriate or fair, they are happening and we need to take account of that. The material risk is that these forces are going to intensify from here."