While Environment Minister Melissa Price was suggesting that the IPCC climate change report was ‘drawing a long bow’ to recommend phasing out coal in favour of low-carbon energy sources, businesses, insurers, lawyers, accountants, peak bodies, and even Government regulators have all been getting on with the job – both here and internationally.
In their December 2017 discussion paper ‘Climate Risk Disclosure – financial institutions feel the heat’ for the Australian Institute of Actuaries, Sharanjit Paddam and Stephanie Wong highlight five factors driving financial institutions, including banks, general insurers and investors, to respond to climate-related risks and opportunities:
1. Investors are concerned about the impact of climate change on investment risk and returns.
2. Directors have legal obligations to disclose and manage material financial risks and climate change is increasingly perceived as a significant risk.
3. Customers increasingly want financial institutions to offer products that manage their
current and future exposure to climate change.
4. Regulators are concerned about the systemic threat that climate risk could pose to financial stability, as well as the threat to individual financial institutions.
5. Regulators have developed disclosure standards for climate risks, supported by companies, investors, ratings agencies and other stakeholders.
Munich RE, a leading insurer globally, publishes a very informative natural catastrophes website providing “comprehensive, reliable and professional data on insured, economic and human losses caused by any kind of natural peril”.
While the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have copped some flak during the Hayne Royal Commission for being too lenient on financial institutions, they do deserve some recognition for the work they have been doing on climate risk.
In February 2017, Mr Geoff Summerhayes, Executive Board Member of APRA delivered a speech to the Insurance Council of Australia in which he stated that APRA believed “many climate-related financial risks were no longer future concerns. They were “foreseeable, material and actionable now”.”
He followed up with an address to the Centre for Policy Development in late November 2017, in which he noted:
“APRA’s concern here goes beyond the impact more frequent and damaging natural disasters may have on insurers’ balance sheets and their capacity to pay claims. It also flows through to insurers’ ongoing ability to keep premiums affordable and available in high-risk areas. Several smaller insurers are already reluctant to underwrite policies for some customers in high-risk parts of Australia, while general insurers have come under intense political and consumer pressure to justify substantial premium rises that have made insurance in high-risk areas harder to afford.”
Later in his address, he remarked:
“APRA is not a scientific body, and I can’t say with 100 percent conviction to what extent scientists’ predictions of increasing temperatures, rising sea levels, more frequent droughts and more intense storms will impact the Australian economy. But what I can tell you with absolute certainty is that the transition to a low carbon economy is underway and moving quickly. The weight of money, pushed by commercial imperatives such as investment, innovation and reputational factors, is increasingly driving that shift, rather than scientists or policymakers.” (emphasis added)
In a keynote address by John Price, ASIC Commissioner, to the Centre for Policy Development conference ‘Financing a Sustainable Economy’ (Sydney, 18 June 2018) ASIC’s key priorities in the area of climate risk were highlighted:
- “Firstly, we are focussed on strong and effective corporate governance. We consider that the prudent and appropriate management of issues such as climate change (be it climate risk or opportunity) begins with the core fundamentals of corporate governance – integrity, transparency, accountability and acting for a proper purpose. This must be led by directors and senior management; and
- Secondly, we are focussed on disclosure. Where the law requires disclosure of climate risk, we are strongly focussed on ensuring that the law is complied with in a way that is useful and relevant to the market.”
In a recent media release, ASIC reports on climate risk disclosure by Australia’s listed companies (20 September 2018), Commissioner Price said:
‘Climate change is a foreseeable risk facing many listed companies in the Australian market in a range of different industries. Directors and officers of listed companies need to understand and continually reassess existing and emerging risks (including climate risk) that may affect the company’s business – for better or for worse.
‘Climate risk disclosure practices are still evolving, not only in Australia but also globally. We intend to monitor market practice as it continues to evolve and develop in this area.’
Almost two years ago, the Australian Institute of Company Directors (AICD) published guidance for directors in the resource Climate Change and Good Corporate Governance.
In an AICD Member Update, ASIC speaks up on climate change risks (26 June 2018), directors’ attention was drawn to legal advice from Noel Hutley QC, and the proposed fourth edition of the ‘ASX Corporate Governance Council Principles and Recommendations’, which includes specific reference to climate change being a source of environmental risk. The article notes that:
This reference sits within the commentary on the revised Recommendation 7.4: “A listed entity should disclose whether it has a material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks.” It encourages those entities that have a material exposure to climate change risk to consider implementation of the TCFD recommendations, while stating that “entities that believe they do not have any material exposure to environmental or social risks should consider carefully their basis for that belief and benchmark their disclosures in this regard against those made by their peers”.
Perhaps in the light of all these developments, we could ask our Environment Minister, and indeed all members of Cabinet, to consider how well they are modeling ‘good governance’ when responding to climate risk data such as that presented in the IPCC report. (An excellent 10 page summary of the IPCC report has been prepared by the World Meteorological Organisation (WMO) and United Nations Environment Programme (UNEP).
The cost of power is only one of the costs we all need to consider at present, as we contemplate paying larger insurance premiums due to climate risk, being advised of new insurance policy exclusions for climate-related catastrophes, and the loss of lives, homes and businesses due to extreme climatic events.