….and where would you expect it to come from? The financial sector, of course!
In a serious ‘stepping-up’ of the recognition of Climate Change and the myriad of impacts on financial markets, the Australian Prudential Regulation Authority (APRA) says it will enforce a set of climate change stress test on banks, insurers and superannuation funds from mid-2020. The tests will measure the exposure of these groups to the physical risks of climate change such as floods, fires and cyclones; and the economic risks associated with the transition to a low carbon economy including abrupt price changes of assets, potentially stranded assets and cost of capital.
The tests will be implemented after the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), chaired by Bank of England Governor Mark Carney, releases new economic and environmental modelling based on climate transition scenarios. APRA will use these models as the basis to ‘climate stress test’ the banks.
APRA Executive Geoff Summerhayes told Parliament this month, the regulator was considering three models of climate change scenario.
A ‘hothouse world’ where nothing is done to halt global warming
An orderly transition to a low-carbon world
Late policy action resulting in a chaotic transition.
The results of the stress tests are expected to impact investment policy encouraging organisations to resign their support of risky assets or investments; sharply reprice policies and loans or, banks and insurers who refuse to plan for climate change impacts, might be forced to hold increased capital for times of crisis. The Reserve Bank will also use the models to analyse the impact of climate change on the national economy and review policies geared toward a low emissions future.
For Australian companies, the resulting impacts are significant. News that the Australian Securities & Investment Commission (ASIC) will monitor the activities of companies to determine if they are disclosing known risks to shareholders, will no doubt send a shudder through the corridors of ASX listed companies. Combined with the potential for global governments to implement carbon pricing policies, it cannot be understated that the key risk to companies is their credit rating. This means all businesses will have to disclose their climate risks and their mitigation strategies, along with their Environmental, Social and Governance (ESG) position.
The financial regulator’s move signals a huge shift in Australia’s movement towards sustainability and places climate change firmly on the national agenda. It’s shining a spotlight on the irrefutable fact that climate change impacts our economy and threatens our position on a global scale. With the financial markets leading the charge towards recognition of the economic impacts of climate change, it’s inevitable that transparent ESG Sustainability practices will become the norm for Australian and global business.
Based on a story in the Weekend Australian 21-22 December 2019.