As has been heavily covered in the financial press, there has been a significant shift in APRA’s position on the relevance of climate change risk to the financial sector.
In a recent keynote speech to the Insurance Council of Australia entitled 'Australia's New Horizon: Climate Change Challenges & Prudential Risk', Mr Geoff Summerhayes (Executive Board Member of APRA) stated:
- APRA-regulated entities can no longer treat climate change as ‘non-financial’ issue, or one that will only crystallise in the distant future. Associated risks extend far beyond the physical (ecological) realm to economic transition risks (regulatory, technological and societal). Many of these risks are financial in nature, foreseeable and material – and are actionable now by Australian banks, insurers, asset owners and asset managers.
- In dealing with these risks, ‘scenario planning is the new normal’. Markets and investors increasingly expect corporations to apply a sophisticated and robust approach to modelling of the potential impacts of climate-related risks under different scenarios, and over different time horizons. This includes the sub-2°C transition scenario around which the Paris Agreement (ratified by Australia in November 2016) is anchored. The Recommendations of the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), released on 14 December 2016, provide clear guidance in this regard.
- A failure to proactively govern the financial risks associated with climate change, now, can present significant litigation exposures for corporations and their directors.
Implications and next steps
Mr Summerhayes’ statement is the first by an Australian corporate or prudential regulator to clearly position climate change as a material financial risk. But whilst it may signal a significant shift in domestic prudential practice, in reality it merely more closely aligns our regulatory environment with that of other corporate or prudential regulators, treasuries and stock exchanges around the world.