Australia’s financial regulator has warned that climate change poses a material risk to the entire financial system, and has urged companies to start adapting.
Geoff Summerhayes, from the Australian Prudential Regulation Authority, says it is unsafe for companies to ignore the risks of climate change just because there is some uncertainty, or “even some controversy”, about the policy outlook.
Speaking at the Insurance Council of Australia’s annual forum in Sydney, Summerhayes said climate change posed a physical risk and a transition risk for Australian companies.
He said the transition risks stemmed from coming changes in policy, law, markets, technology and prices that were part of “the now-agreed transition to a low-carbon economy”.
Summerhayes said Apra wanted companies to start incorporating sophisticated “scenario-based analysis” of climate risks into their business outlooks.
He said Apra intended to start running stress tests of the financial system to see if it would survive various adverse climate shocks.
“While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem,” he told the audience on Friday.
“The key point I want to make today, and that Apra wants to be explicit about, is that this is no longer the case.
“Some climate risks are distinctly ‘financial’ in nature. 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,” he said.
“It could be the case that, 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.”
His warning comes after a bruising fortnight in federal parliament, during which the government and its opponents argued about Australia’s energy policy. The Coalition is intent on making energy policy a point of sharp partisan difference this year.
Last week, a coalition of business, energy, climate and welfare groups issued a joint statement warning that a decade of partisan politics and finger-pointing had destroyed investor confidence in Australia’s energy sector.
Summerhayes pointed to the Paris Climate Agreement, ratified by Australia in November, as a significant policy moment for all governments.
He said it provided an “unmistakable signal” about the future direction of policy and adjustments that companies, markets and economies “will need to make”.
He said all Apra-regulated entities would need to adapt to the coming regulatory changes.
“I think the days of viewing climate change within a purely ethical, environmental or long-term frame have passed,” he said.
“More and more, the conversations we are having are about the practical realities and consequences of a changing climate.
“We’re now at the stage of the collective effort, calibration and creativity to turn ambition into reality. What happens next isn’t just a matter for rocket scientists – but also humble prudential regulators.”
Summerhayes, a former CEO of Suncorp Life, said businesses risked making life more difficult for themselves if they believed certain climate mitigation policies might be delayed or fail to eventuate, and used that as an excuse not to prepare themselves.
“It may be that the latter scenario could make risks greater and more abrupt,” he said.
“This is because 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.
“Like all risks, it is better they are explicitly considered and managed as appropriate, rather than simply ignored or neglected.”
Kate MacKenzie, from the Climate Institute, welcomed Summerhayes’ speech.
“It’s reassuring to see that Australia’s prudential supervisor understands that, regardless of controversy in the political realm, climate change is a real and rapidly evolving risk for our financial sector and broader economy,” she told Guardian Australia.
“His speech acknowledges many of the key financial implications of climate change which we’ve been researching and communicating for the past few years.
“He specifically mentioned superannuation funds’ exposure to climate risk through their portfolios, and banks via their loan books, including via physical impacts to houses on their mortgage books.
“Speeches are an important tool for Apra to communicate its concerns and priorities, so this sends a clear signal to all Australian banks, insurers and superannuation funds that they should be considering climate risk.”
