APRA considers climate stress tests to avoid the next GFC

The Australian Prudential Regulation Authority has warned that organisations not taking climate change seriously could undermine the entire financial system.

In a speech at the Insurance Council of Australia’s annual forum – the first major speech APRA has given on climate change – APRA executive board member Geoff Summerhayes said APRA was putting itself on the “front foot” in regards to climate change preparedness, and could soon introduce climate change “stress testing” of financial institutions.

While climate risks had traditionally been seen as a “future problem or non-financial problem”, Mr Summerhayes said this was no longer the case.

“Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now.”

As well as physical risks from climate change and the transition risks as the world moved to a low-carbon economy, he also revealed that some companies could place themselves at risk of litigation.

Directors could be held personally responsible for breaching duty of due care and diligence

He pointed to a recent legal opinion sought by the Centre for Policy Development and the Future Business Council, which found that “company directors who fail to properly consider and disclose foreseeable climate-related risks to their business could be held personally liable for breaching their statutory duty of due care and diligence under the Corporations Act”.

The transition now happening could lead to “significant repricing” of carbon-intensive resources and activities, and reallocation of capital, Mr Summerhayes said, and it was “unsafe for entities or regulators to ignore risks just because there is uncertainty, or even controversy, about the policy outlook”.

“Like all risks, it is better they are explicitly considered and managed as appropriate, rather than simply ignored or neglected.”

The Climate Institute said the advice was significant, and financial institutions should pay close attention.

“Speeches are a key form of communication for authorities such as APRA, so this is a clear signal that Australian financial institutions need to understand their climate risk and have a considered response,” Climate Institute head of finance and investment Kate Mackenzie said.

“While our politicians are turning our response to climate change and energy policy into political playthings, investors, business leaders and financial system regulators around the world are seeking ways to manage the transition to clean energy.”

Similar advice has been provided internationally, with a 2015 report from the French Treasury saying that physical and transitional risks associated with climate change needed to be integrated into organisations’ risk frameworks.

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