In a speech to the International Insurance Society Global Insurance Forum entitled 'Buy now or pay later' Australian Prudential Regulation Authority (APRA) Executive Board Member Geoff Summerhayes addressed the global debate about the financial impact of taking strong action to address climate change, warning that failing to take sufficient action now will lead to much higher economic costs in the long-term.

Some Key Points

•  Action on climate change remains a contentious issue in Australia and more broadly: For the past 15 years, climate change and the 'tension between' the environmental necessity of taking decisive action to limit global warming on the one hand, and the economic impacts of doing so on the other, has been a topic of vigorous debate in Australia and more globally.  
• Now 'orthodox economic thinking' that climate risk is a financial risk: Mr Summerhayes observed that APRA first flagged climate risks as financial risks in 2017, and since then the idea that climate risk poses a financial risk has become widely accepted including by Australian regulators the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC).  'When a central bank, a prudential regulator and a conduct regulator, with barely a hipster beard or hemp shirt between them, start warning that climate change is a financial risk, it’s clear that position is now orthodox economic thinking' he said.
• Inevitable cost — but failure to take sufficient action could lead to higher economic costs in the long term: Mr Summerhayes said that whether action was taken now, or in the future, there is a cost involved.  'Climate risk is both an environmental problem and an economic one….In reality, we pay something now or we pay a lot more later. Either way, there is a cost'.  Mr Summerhayes added that 'Taking strong, effective action now to promote an early, orderly economic transition is essential to minimising those costs and optimising the benefits. Those unwilling to buy into the need to do so will find they pay a far greater price in the long-run'.
• The global insurance industry, as risk experts, should play a leadership role: Mr Summerhayes said that lack of reliable data on what the costs are and how they will evolve is hampering informed debate on the issue.  He suggested that 'as experts in risk management, the global insurance industry can – and must – play a leadership role in addressing this data deficit.  By developing more sophisticated tools and models, and especially through enhanced disclosure of climate-related financial risks, insurers can help business and community leaders make decisions in the best interests of both environmental and economic sustainability'.
• Translating acceptance of the risk into action 'remains challenging': Mr Summerhayes said that despite acceptance of the risk, 'translating that conviction on the need for stronger action into a consensus on how best to act remains challenging'.  He added that this is especially the case in Australia given iron ore, coal, natural gas, aluminium ores and crude petroleum among its top ten national export earners.
• The case for taking action? Mr Summerhayes said that by disclosing their climate risks and how they are addressing them in line with the Task Force on Climate-related Financial Disclosures  (TCFD) recommendations, insurers, banks and superannuation funds 'put themselves in the best position to adjust to the new economic reality. More importantly, the availability of more timely, reliable and granular data will help all businesses, investors and regulators to better understand the transition-physical risk trade-off, and the reality that there is no avoiding the costs of adjusting to a low-carbon future'.  He added that 'companies that delay or avoid adjusting to new economic realities, no matter how famous or successful, can quickly find themselves on the verge of a Kodak moment'.
• APRA's heightened expectations: Referencing the findings of APRA's recent survey of 38 of Australia's financial institutions (see: Governance News 27/03/2019) which called on institutions to translate awareness of the risk into action, Mr Summerhayes said that APRA is 'embedding the assessment of climate risk into our ongoing supervisory activities'.  More particularly, he said that APRA intends to We 'probe the entities we regulate on their risk identification, measurement and mitigation strategies. We expect to see continuous improvement in how entities are preparing for the transition to the low-carbon economy'. Mr Summerhayes said that though APRA is not 'mandating' that entities adopt the TCFD recommendations, it is 'strongly encouraging entities' to do so'. 
• Mr Summerhayes said that APRA has no plans to introduce a specific climate-related prudential standard 'at this time', but 'global regulatory community is steadily moving in this direction which is yet another reason why prescient business leaders should be taking steps now to get ahead of the curve'.

[Note: For expert insights into the regulators' heightened expectations with respect to climate risk disclosure see: Heightened expectations of climate-related disclosure and assurance, 15/05/2019]

[Source: Buy now or pay later, Speech by Geoff Summerhayes, APRA Executive Board Member - International Insurance Society Global Insurance Forum, Singapore 21/06/2019]