APRA lays down a marker on climate change risks in the financial sector

Today Australia’s prudential regulator has laid down an important marker on climate-related risks and their impact on the financial sector. This new statement from the Australian Prudential Regulatory Authority came in a speech on 17 February by APRA Executive Board Member Geoff Summerhayes to the Insurance Council of Australia’s Annual Forum. This provides a crystal-clear indication that the company-level and systemic impacts of climate change are now attracting increased scrutiny from Australia’s financial regulators and policymakers, as they are around the world. 

 

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Mr. Summerhayes’ speech emphasises the immediate and directly financial nature of many climate-related risks and says that these risks are now firmly on the horizon for Australian financial sector entities and the prudential regulator. 

“While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem. […] This is no longer the case. Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now.”

The speech, entitled ‘Australia’s new horizon: climate change challenges and prudential risk’ is the first of its kind by a leading Australian regulator. According to Mr. Summerhayes, his remarks are “absolutely consistent with the approach that is being taken overseas”.
Leading global regulators including the Bank of England, the Financial Stability Board and others have been at pains to emphasise both the physical risks associated with climate change (which include the direct business impacts of a changing climate) and the transition risks that stem from a complex adjustment to changes in technology, policy and economic structure as we transition to a low-carbon future. Today’s speech reiterates that approach and highlights the importance of predictable, effective policy responses to meet emissions reductions commitments, noting that policy uncertainties, delays, and reversals make transition risks larger and more difficult to deal with. 

Mr. Summerhayes made clear that APRA expects regulated financial-sector entities like insurers and banks to consider the impact of climate-related risks on their business.

A comprehensive understanding that will help to identify and avert potential vulnerabilities is not possible unless entities and regulators are systematically monitoring, disclosing and talking about these risks.”

APRA’s statement follows significant developments in the second half of 2016, including the entry into force of the Paris Climate Agreement and the Financial Stability Board’s recommendations on climate-related risk disclosure. Today’s speech is another crucial step in the Australian context, providing the clear regulatory guidance and leadership on the financial impacts of climate change that many market participants have been calling for.

Another major development, and one cited in Mr. Summerhayes’ speech, was the release last year of a new legal opinion commissioned by CPD and the Future Business Council on directors’ duties and climate change. The opinion demonstrates that directors who fail to consider the impact of foreseeable climate change risks on their business properly could be held personally liable for breaching the duty of due care and diligence they owe to their companies. Last October, we co-hosted a high-level roundtable to discuss the implications of the opinion with 30 representatives from the regulatory, corporate, superannuation and legal communities – including Mr. Summerhayes. In today’s remarks, he said that “in this and other discussions, I have detected a broad appetite for regulators and firms to get much better at this now that the horizon for Australia is in sharp focus”. Today’s clear guidance from APRA on the importance of climate risk, and clarity on legal obligations of company directors to consider the financial impacts of climate change, mean that this issue will be firmly on the agenda for company directors and investors. 

 

Key documents and media coverage

Speech by Geoff Summerhayes

CPD media release: APRA speech shows regulators and companies are stepping up their game on climate risk

 

Earlier CPD work on this issue:

Roundtable on directors duties, climate risk and sustainability

Legal opinion on directors duties and climate risk

CPD media release: Australian company directors must consider and disclose climate change risks to escape liability for breach of duty 

Company directors can be held legally liable for ignoring the risks from climate change‘ Sam Hurley, Travers McLeod and John Wiseman, The Conversation

 

Related reading:

Australias Financial System and Climate Risk: Discussion Paper, The Climate Institute

Paris Agreement a watershed moment for corporate Australia‘ Adele Ferguson, Australian Financial Review

Business leaders heed warning on climate change risks‘ Damon Kitney, The Australian

Company directors to face penalties for ignoring climate‘ Jessica Irvine, The Age/SMH

Directors ignore climate risks at their own peril‘ Bryan Horrigan, Australian Financial Review

The Paris climate agreement is a game-changer – and business risks being left behind‘ Sam Mostyn, The Guardian

Breaking the tragedy of the horizon – climate change and financial stability – Mark Carney, 2016

Phase I Report of FSB Task Force on Climate-related Financial Disclosures – FSB, 2016

Adapting portfolios to climate change – BlackRock Investment Institute, 2016

Directors personal liability for corporate inaction on climate change – Sarah Barker, 2015

Climate Change Risk Sovereign Bond InvestmentsyourSRI

 

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