On 23 November, CPD co-hosted the Climate and Recovery Initiative Public forum. We were joined by three special guest speakers: APRA Executive Board Member Geoff Summerhayes, ClimateWorks Australia CEO Anna Skarbek, and AustralianSuper Chair and former Australian Ambassador to the United States, Don Russell.
The discussion of Climate and Recovery Initiative Public forum focused on climate change, the COVID-19 recovery and the road ahead in 2021, taking stock of recent global developments on climate and clean energy and the implications for Australia as we look towards next November’s COP26 summit. It was also a chance to highlight the important work underway through the Climate & Recovery Initiative, a new collaborate effort we are running with ClimateWorks Australia and other partners to identify the best ideas and opportunities to align Australia’s economic recovery with a net zero transition.
In his remarks, Geoff Summerhayes highlighted important steps that Australian institutions and regulators had taken to step up their focus on climate risk, and said these put us in a stronger position to tackle the challenges ahead:
Thanks Geoff and Anna. I am very pleased to be able to offer my thoughts on all of this.
I guess it is easy for us now that we are all caught up in the circus of the transition to forget a little bit how important this election was. I think its fair to say the world was teetering on the edge of something really chaotic. Countries are path dependent and I think it is fair to say that another four years of the Trump Administration would have done lastingdamage to US institutions. But I think it would have also set back the chances of any global cooperation on a whole range of issues, including climate, for a very long time.
Knowing the US, I’m sure there are still those fearful that we will look back and we will see that Trump was the first of the mad US presidents. For the time being, I think we should all think that the US has stepped back and has reconsidered the last four years and has signed up to a more orderly and rational approach to public policy.
But I think it’s a mistake to see that we are moving back to the Obama years, particularly around China. The US remains incredibly polarised, and notwithstanding the fact that Biden was a clear winner, Trump came very close to winning – very close indeed. The Republican Party itself improved its position in the House, and did better in the Senate than was expected,and in state races all around the country.
The big change with the Biden Administration is that there will be a strategy on climate. They will rejoin the Paris Agreement, which means that they will have a plan for COP26. As ever, its worth remembering that regardless of who controls the Senate, the US will not be in a position and can never be in a position to enter into binding agreements. The treaty power in the Senate is overwhelming. It simply requires 60 votes. So there is no way the US can enter into binding commitments. The world I think has come to understand this and can live with it. But it has galled a lot of players and participants when the US expects other countries to make commitments when they themselves cannot.
I think its fair to say that it is unlikely that the Biden Administration or the Democrats will control the Senate, and we are looking at a return to the last two Presidents where a lot of action came through executive powers. I’ve been suspicious for some time that the Supreme Court will eventually curb the power of the US President to rule by fiat. I think that was all in abeyance while Trump was President, but I wouldn’t be surprised at all if the Supreme Court [took] action in the next four years to rein in powersthat President Obama took upon himself and Trump took upon himself.
So the executive authority I expect may well be constrained in the next four years. Biden has pledged to spend $2 trillion on clean energy. There is nothing like dollars to form the basis of the discussion with various interests in the US. So assuming that the Senate is of a mind to try and build a greater level of cooperation with the Democrats than has been the situation in the past, that at least provides some mechanism whereby there is scope for the Senate and the Administration to coalesce around some climate change initiatives.
I think it’s important to accept that China is inevitably going to play a clear role in this. Xi and Obama were the important drivers of the Paris COP outcome. I think it’s fair to say it wouldn’t have happened without US-China cooperation. It is hard to see COP26 being a success without US/China cooperation. A number of people have made this observation and it is true – climate is an opportunity for China and the US to find a new accommodation. But the key thing is that they both need to want to.
It will be a familiar world with a Biden Administration. The US will be looking to work with allies. But they will be calling out human rights abuses in China and the rights of Hong Kong and Taiwain. And China will find this particularly difficult and awkward. It may well take more discord before China and the US are willing to cooperate.
So I think, collectively, we should look forward and plan assiduously for COP26. But we shouldn’t allow ourselves to be totally disappointed and devastated if COP26 doesn’t deliver the results we are looking for. Many have observed that China thinks in terms of centuries, possibly millennia. One year may well just have to go through to the keeper before they are willing to engage with the Americans.
Having said all of that, I think there are extraordinary opportunities around COP26. It is good to remember that COP26 started off in Brazil, meandered through Chile, ended up in Spain, and most people have forgotten about it. There will be more structure, simply because the Americans will have a plan and the world at the very least will have to adjust to that. It will be very dangerous for Australia, in this sort of environment, to be viewed as a free-rider on global efforts to reduce emissions. A number of people have observed that the EU is actively considering border carbon taxes to target countries that are not pulling their weight. Similar ideas are being floated in the US, particularly around Biden himself. I have always thought it is dangerous when US Nobel Laureates like William Nordhaus are advocating tariffs on non-participants on global [issues] like climate change.
Australia will not want to be seen to be actively opposing the US in the run up to COP26. So we will be in a tricky position where we will need to trim our policies so we are not voting against the US. Fortunately, there are parallels between our Technology Roadmap and the US and their $2 trillion. But it is going to be particularly dangerous for Australia to be flirting with such things as carryover credits. That puts us in very bad company, with a whole stack of other deadbeat countries, at a time when the world will be wanting to lift global standards. So I think it will be very much in Australia’s interests to draw a line under carry-over credits and sign up with the rest of the right-thinking members of the world community.
At AustralianSuper – we have, at the Board’s last meeting last month, committed to an Australian Super portfolio which will be carbon neutral by 2050. It is important to realise that the fund will always, does always act in the best interests of members, and that our commitment around carbon neutral by 2050 comes very much from an active role of incorporating climate risk into the investment decision. This is not a solution we have imposed on the portfolio. It is what grows out of a long-term view about the importance of climate risk in the longterm returns of our members.
The other important thing is that we are on track to achieving a carbon neutral portfolio by 2050. Of potentially even greater interest is that we are on track for a 45% reduction from the 2010 portfolio by 2030. So I think it is a powerful point that Australian Super, acting in the best interests of the members and explicitly taking account of climate risk as a long-term investor, has come to the position that for the best interests of the members we need to be carbon neutral by 2050.
As a long-term investor, we have a very strong interest in getting and being able to understanding how companies are managing climate risk, making sure that companies are actively engaged in long-term strategic management of their companies around climate risk. We are very interested in companies developing a capacity to outline scenarios around various different views of the world. Going back to Geoff’s remarks right at the beginning, the whole TCFD notion and the whole notion that directors and businesses have to – in discharging their responsibilities – take account of all of this as they go about running their companies.
I finish my five-year tenure as an APRA Board Member at the end of this year. 2020 has been an extraordinary year of unprecedented global developments, including on climate change.
I am grateful to CPD for providing this opportunity to share some reflections on progress that has been made on addressing climate change risk as a financial risk. I also want to outline some vital next steps from APRA and other regulators.Australia’s financial system depends on international capital, so one of the main points I want to emphasize, is how Australia’s response on climate financial risk has been, and will continue to be, informed by regulatory and market developments internationally.
We are now better placed for this challenge, and we need to be. Because we are confronting fundamental questions about our institutions’ competitiveness and risk preparedness in global capital markets that will be reshaped at an accelerating pace by impacts and responses to climate change.
To begin with, let’s look back four years – it was new ground for an Australian financial regulator to speak publicly on climate risk when I gave APRA’s first major statement on its approach to climate financial risk in early 2017. At that time, financial firms were largely unsure about the need, and how to integrate, systemic climate risks into core business planning, risk and investment decisions. And it’s fair to say there was some uncertainty among regulators about the right approach – including the right combination of carrots and sticks to support better industry responses.
The key message I delivered then was that rather than being a long-term or non-financial problem, some climate risks are distinctly financial in nature, and many were foreseeable, material and actionable then.
But, as I explained at the time, we weren’t the only ones who said this domestically. it was consistent with the approach that global regulators were taking, led by then Bank of England Governor Mark Carney. APRA’s considerations in 2016 to make statements on climate change were informed by two global developments and one local: The Paris Agreement, the FSB’s Taskforce on Climate-related Financial Disclosures, and here domestically, the Hutley – Hartford Davis opinion on director’sduties.
The implications of these signals, in capital markets, financial regulation and legal cases has continued apace since.As far as climate financial risk is concerned, today, Australia’s financial regulators are on a unity ticket: APRA, ASIC and the Reserve Bank have comprehensively outlined our respective approaches, responses and expectations to climate risk.
A key point I want to make is that, over this period, a key priority for us, given international capital flows, has been ensuring that Australian institutions understand these global trends and are converging to what is emerging global practice on climate risk.Frankly – with climate risks upon us, and the system-wide impacts of climate change increasingly apparent, we were seeking to ensure that Australian institutions were not unprepared or adversely impacted by what was happening globally.APRA took the view in late 2016, ahead of our public intervention, that delaying would have made the transition risks for Australia regulated firms even sharper and more difficult to manage.
In practice, this has meant:
For regulators, this has also meant building our own global linkages and participation on climate risks – including through initiatives such as the global UNEP Sustainable Insurance Forum (which I chair) and the Central Banks and Supervisors Network for Greening the Financial System (NGFS) which involves the Reserve Bank of Australia and the bulk of its global counterparts — the US Federal Reserve has announced it will join soon.
So – where are we now? There has been a rapid transition in the larger firm’s mindset to incorporating climate in strategy, governance and risk management. We are seeing a significant shift towards industry ownership and leadership on climate risk.
One example is the work of the industry-led Australian Sustainable Finance Initiative (ASFI), which after more than a year of deliberations will release its recommendations tomorrow. Another example is the ongoing work of groups like the Investor Groupon Climate Change and other organizations like ABA, ICA and Australian Institute of Company Directors, collectively and individually, working to build understanding to benefit all. This event is another example where CPD and ClimateWorks haveconvened leaders from across the economy to identify the alignment opportunities between our COVID recovery and these climate priorities.
In June, the NGFS described the COVID-19 pandemic as “a real-life stress test of what we could potentially experience in an increasingly unstable climate or disorderly transition shock”. Which is why the Council of Financial Regulators is conducting a climate vulnerability assessment (CVA) as part of our climate risk initiatives. We will be working with the larger banks in Australia in 2021 to implement the CVA, building both knowledge and understanding of climate risks and opportunities in the banking sector, as well as supporting industry leadership and capability development, and providing valuable insight into priority areas for further development.
We expect the insights from the CVA to be valuable across industries, and in combination with the draft Prudential Practice Guide on climate risk that APRA intends to publish in 2021, which will provide tangible guidance and support for the finance sector as it continues to embed consideration of climate risk into its governance, strategy and risk management functions.Our lived experience of the bushfires last summer is also a further reminder of what climate change is going to mean for Australia. The bushfires left a financial impact of over $10 billion, (of which less than half was covered by insurance), 33 people dead, over 3,000 homes destroyed, and billions of animals dead or displaced.
And while 2019 was the hottest year on record for Australia – as well as the driest year on record in NSW – the science points to 2019 in the not too distant future being seen as an average year. The Bushfire Royal Commission recognized the risks that more frequent extreme weather events pose in terms of disaster resilience, and has put forward a range of recommendations.
In the same vein, financial regulators recognise the material risk presented by climate change for the finance sector, and are acting to support the industry as it addresses these risks and also the opportunities where they occur. Let’s look at the road towards COP26. Steps towards better management on climate financial risk are critical – because the pace of change, and the risks and opportunities that go with it, will continue to accelerate.
Even in the past few weeks, we’ve seen a series of announcements from companies, investors and trading partners. To facilitate the flow of capital globally, financial regulation tends to progressively align and, in some cases, quickly.So some recent international policy and regulatory announcements are seen as reliable market signals for the direction of travel.These include the UK announcement that climate disclosures will be made mandatory for large companies and financial institutions over the next five years as part of its net zero commitments.
Closer to home, New Zealand will do so by 2023. The US Federal Reserve has recently published its first statement on the financial and economic implications of climate change. With all roads leading to COP 26 in Glasgow next year, we can expect thisdynamic environment to continue – with major near and long-term implications for Australian institutions. The COVID pandemic and the global recovery and rebuilding phase before us will have major implications for how this plays out.
In many countries, Australia included, this is seen as an immense opportunity to accelerate investment, innovation and the transition that can support a strong recovery now and a more resilient, climate-aligned economy in the future. The Australian Finance Minister has been making this point strongly in recent weeks.
With both risks and opportunities rising, it will be critical for Australian firms to ensure that they have sufficient responses to both physical and transition risks, but also are maintaining our highly regarded financial sectors’ competitiveness in the emerging green economy. Thanks to steady progress on climate risk in recent years, we’re approaching this juncture in a stronger position.
I’m encouraged that we’re up for the challenge – not just of responding to risk, but of seizing new financial sector opportunities that will flow from this next industrial revolution, to a low carbon future, which like previous transitions will not only require massive investment, it will also create a wealth of opportunities and leave a raft of stranded assets weighing on those that didn’t see it coming.
I am fond of the quote. “History doesn’t repeat itself but it often rhymes.” Australia has lead by example during the pandemic. We can be justifiably proud of our country’s leadership at all levels and across all sectors of the community.
We will need all of that and more for the climate change challenge.
It is encouraging to see the leaders convened at this event collaborating and initiating.
APRA and CFR agencies will continue to play their part to support capability building and climate risk management to ensure a stable and resilient financial system for this and future generations of Australians.
