The Australian Prudential Regulation Authority (APRA) admonished companies for a lack of action on risks from global warming, warning at the Insurance Council of Australia’s Annual Forum that climate change could “threaten the stability of the entire financial system.”
“While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem. Many of these risks are foreseeable, material and actionable now,” said APRA executive board member Geoff Summerhayes at an Insurance Council conference in Sydney last week.
The finance regulator said it would be applying climate change stress tests to Australia’s financial institutions.
He stressed that while APRA worked to offer foresight and guidance on various emerging risks such as climate, cyber, and fintech, recently climate risk had risen to the forefront.
Summerhayes explained that financial threat from climate change risks could be more sudden and devastating due to a lack of policy and regulatory action.
“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,” Summerhayes said.
“Like all risks, it is better they are explicitly considered and managed as appropriate, rather than simply ignored or neglected.
“So what can you expect to see from us? A greater emphasis on stress testing for organisational and systemic resilience in the face of adverse shocks.
“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.”
APRA’s intervention at the Insurance Council conference follows a similar warning about the threats climate change posed to financial stability two years ago by the head of the Bank of England, Mark Carney, when in his landmark speech, he said it was the “tragedy of the horizon.”
“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix,” said Carney.
And in the same vein, Clyde & Co recently advised reinsurers and insurers to consider whether their businesses are effectively complying with climate change regulation, to protect their underwriting from the potential impact of lawsuits.
The warning came at a Clyde & Co seminar on the impact of climate change on directors & officers’ (D&O) cover, after the firm said increased scrutiny has resulted in a possible upwards trend in climate litigation and disputes “in which corporate boards are being held to account for alleged reporting, regulatory and fiduciary failures linked to climate change and the fossil fuel sector.”
The panel described three key types of climate change related litigation that could hit re/insurers: companies failing to disclose how climate change effects their business, shareholders, pension fund members or investors suing investment and pension funds for investment in businesses adversely affected by climate change, and companies contributing directly to pollution and climate change.
