Investors welcome Australian financial regulator’s major statement on climate change and prudential risk

A major speech today by the Australian financial regulator APRA focusing on climate change and prudential risk has been warmly welcomed by investors.

The address by Geoff Summerhayes, Executive Board Member of the Australian Prudential Regulation Authority, which oversees banks and most of the superannuation industry, was made at the Insurance Council of Australia and noted how climate risks are ‘financial’ in nature.

The wide-ranging speech touched on stranded assets and the system-wide implications of climate change.

Summerhayes’ remarks drew on Bank of England Governor Mark Carney’s pivotal remarks about the ‘tragedy of the horizon’. “I think the days of viewing climate change within a purely ethical, environmental or long-term frame have passed,” Summerhayes, former CEO at ASX-listed insurer Suncorp Life, said.

The speech, believed to be the first time APRA has made a public statement in relation to its prudential regulatory approach to climate risk as a financial issue for the entities it regulates, was welcomed by the Investor Group on Climate Change (IGCC).

IGCC Chief Executive Emma Herd said the comments “bring home the reality that climate change is a major economic force impacting the way we think about risk and opportunity”. She said investors now look forward to working with financial regulators and Australian business on how to best promote an efficient and smooth transition to a net zero emissions economy.The IGCC represents institutional investors in Australia and New Zealand with combined assets of A$1trn (€720bn).

Summerhayes referred to recent legal opinion in Australia that found company directors could be personally liable for breaching their duty of care in relation to climate change. The opinion by barrister Noel Hutley QC was released by the Centre for Policy Development and the Future Business Council in November.

“Significant repricing of carbon-intensive resources”

Summerhayes spoke of the potential exposure of bank and insurance 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”.

Risks “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”.

“The general point,” he told delegates, “is that the transition now in train could led to significant repricing of carbon-intensive resources and activities and reallocation of capital”. Even under a “sanguine view” there would be “systemic impacts”.

Summerhayes’ speech “Australia’s new horizon: Climate change challenges and prudential risk” is available here.