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Category: Climate Change / Business, Economics and Finance / Regulation

Climate change could threaten entire financial system: APRA

Friday, 17 Feb 2017 14:26:48 | Stephen Long

Emissions rise from an industrial plant in Melbourne on April 29, 2014. (AAP: Julian Smith)

Climate change could threaten the stability of the entire financial system, the prudential regulator has warned, as it prepares to apply climate change "stress tests" to the nation's financial institutions.

In its first major speech on climate change, the Australian Prudential Regulation Authority chastised companies for a lack of action on the risks it poses.

"While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem," APRA executive board member Geoff Summerhayes told an Insurance Council conference in Sydney.

"Many of these risks are foreseeable, material and actionable now.

"Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to."

The speech comes as the Government and the Opposition bicker about renewable energy targets amid dismay among industry leaders about a lack of certainty on climate change policy.

The Climate Institute's CEO John Connor described the speech as a "huge" development.

"APRA has never gone out there like this before," he said.

"It's an antidote to the hyper partisan political culture war on climate policy; our regulator's moved to the front foot in managing climate risks."

The Climate Institute and the Investor Group on Climate Change wrote jointly to the Council of Financial Regulators two years calling for regulatory action on the financial risks from climate change.

Lack of policy 'could greatly increase financial risks'

APRA warned in the speech that lack of policy and regulatory action could make the financial risks poses by climate change "greater and more abrupt".

"There could be either sharper, more significant policy changes and market adjustments down the track, or the physical impacts of climate change could become more severe, more likely and more unpredictable," Mr Summerhayes said.

"It's unsafe for entities or regulators to ignore risks just because there is uncertainty, or even controversy, about the policy outlook.

"Like all risks, it is better they are explicitly considered and managed as appropriate, rather than simply ignored or neglected.

"So what can you expect to see from us? A greater emphasis on stress testing for organisational and systemic resilience in the face of adverse shocks.

"Just as we would expect to see more sophisticated scenario-based analysis of climate risks at the firm level, we look at these risks as part of our system-wide stress testing."

APRA's intervention follows a similar though more pointed warning two years ago by the head of the Bank of England about the threats climate change posed to financial stability.

External Link: YouTube: Climate change and financial stability - speech by Mark Carney

It comes in the wake of the Paris Climate Change Accord, which committed the world to taking steps to keep global temperature rises below 1.5 degrees Celsius.

APRA's speech addressed the risks identified by the Bank of England:

  • physical risk around the effects of climate change
  • transition risk from the shift towards a zero net emissions economy
  • liability risk for company directors, trustees, and insurer

Climate change is the "tragedy of the horizon", Bank of England Governor Mark Carney warned in his landmark 2015 speech.

"We don't need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors - imposing a cost on future generations that the current generation has no direct incentive to fix."

External Link: Interactive: APRA on climate change challenges

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