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The climate bombshell the politicians didn't touch

Michael Pascoe
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Never mind the politicisation of energy and carbon policy – the market and legal system is moving rapidly to instil the discipline and punishment the government isn't game to discuss.

That was the core of the climate change bombshell dropped by the Australian Prudential Regulation Authority on Friday. The policy vacuum will be filled by the personal liability of company directors and the disclosure requirements of financial regulators.

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APRA's blunt climate change warning

The Australian Prudential Regulation Authority's very blunt warning of the obvious physical risks and transition risks of moving to a low-carbon economy. Michael Pascoe comments.

If the ABC's Insiders program and the federal Environment and Energy Minister, Josh Frydenberg, are any guide, Canberra hasn't yet grasped the importance of the speech by APRA executive board member, Geoff Summerhayes, to the Insurance Council of Australia forum.

In keeping with the Paris Agreement Australia has signed and the Financial Stability Board's (FSB) policy development, APRA leaves no room for climate sceptics. Both the obvious physical and perhaps less obvious "transition" risks of climate change are real and present dangers to the financial system APRA is charged with safeguarding.

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And it's the transition risks of moving to a low-carbon economy that Summerhayes fingered as being particularly important for financial entities. APRA and its international counterparts fear the impact on banks, superannuation funds and asset managers of changes in policy, law, markets, technology and prices that are part of the agreed transition to a low-carbon economy.

Spare a thought here for the board of the Northern Australia Infrastructure Facility (NAIF) as it considers Adani's application for a billion-dollar loan to build a railway from the Galilee Basis to the Queensland coast. While being lent on by pro-coal government members, NAIF directors would do well to consider why Australia's banks seem to have no interest in financing the line. It's not just a green PR issue – it's the danger of being left with a stranded asset and directors being personally liable.

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Summerhayes quoted legal opinion that it's only a matter of time before directors who fail to properly consider and disclose foreseeable climate-related risks are held personally liable for breaching their statutory duty of care and diligence under the Corporations Act.

The same consideration would weigh heavily on Clean Energy Finance Corporation (CEFC) directors if the government changes the legislation to allow CEFC to lend to new coal-powered electricity generators. 

Summerhayes noted that much of the early focus on climate change risks had been on insurance firms and their exposure to losses from increasingly frequent and severe natural disasters, but there were a variety of other potential issues.

"These include the potential exposure of banks' and insurers' balance sheets to real estate impacted by climate change and to re-pricing or even 'stranding' of carbon-intensive assets in other parts of their loan books," he said.

"They also include exposure of asset owners and managers – an important consideration given the size of Australia's superannuation sector and its heavy weighting towards carbon-intensive equities and a relatively resource-intensive domestic economy."

Frydenberg on Sunday gave the impression the government was determined to bet Australia's energy future on the coal industry finding a way to make carbon capture and storage (CCS) economically viable.

The policy vacuum will be filled by the personal liability of company directors and the disclosure requirements of financial regulators.

Given the coalition's refusal to price carbon so as to give CCS here even a small chance of success, that looks as sensible as an individual betting her financial future on winning OzLotto. That sort of policy response, driven by the coalition's internal ructions, climate sceptics and concentration on simplistic immediate "hip pocket" politics, contrasts with broader forces APRA comprehends.

APRA's view is that the Paris Agreement provided a very reliable signal that policy and regulatory efforts would intensify.

"The transition now in train could potentially lead to significant repricing of carbon-intensive resources and activities and reallocation of capital," Summerhayes said.

"This process will be highly sensitive to changes in regulation, technology, the physical environment and behaviour by investors and institutions – and interrelated perceptions and sentiment about all of the above. Inevitably, even under a sanguine view of how smoothly this transition happens, there will be systemic impacts and implications that have to be carefully monitored."

The Summerhayes speech is APRA's first public stand on climate change. It has not rushed to it, coming nearly two years since the G20 asked the FSB to consider climate change risks and more than a year since the board established its task force on climate-related financial disclosures.

It's in step with the insurance industry increasingly finding its voice on climate change issues after going a little quiet during the Abbott government days of overt climate scepticism.

In another context at the same ICA conference, ASIC chairman Greg Medcraft spoke about the legal licence tending to follow the social licence. On the risks and financial impact of climate change, it seems the market and legal judgments will proceed without political leadership.