In a recent keynote speech to the Insurance Council of Australia entitled 'Australia's New Horizon: Climate Change Challenges & Prudential Risk', Mr Geoff Summerhayes (Executive Board Member of APRA) stated:
- APRA-regulated entities can no longer treat climate change as ‘non-financial’ issue, or one that will only crystallise in the distant future. Associated risks extend far beyond the physical (ecological) realm to economic transition risks (regulatory, technological and societal). Many of these risks are financial in nature, foreseeable and material – and are actionable now by Australian banks, insurers, asset owners and asset managers.
- In dealing with these risks, ‘scenario planning is the new normal’. Markets and investors increasingly expect corporations to apply a sophisticated and robust approach to modelling of the potential impacts of climate-related risks under different scenarios, and over different time horizons. This includes the sub-2°C transition scenario around which the Paris Agreement (ratified by Australia in November 2016) is anchored. The Recommendations of the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), released on 14 December 2016, provide clear guidance in this regard.
- A failure to proactively govern the financial risks associated with climate change, now, can present significant litigation exposures for corporations and their directors.
Implications and next steps
Mr Summerhayes’ statement is the first by an Australian corporate or prudential regulator to clearly position climate change as a material financial risk. But whilst it may signal a significant shift in domestic prudential practice, in reality it merely more closely aligns our regulatory environment with that of other corporate or prudential regulators, treasuries and stock exchanges around the world.
For a number of years, MinterEllison has been at the forefront of thought leadership in this area and is unique amongst our commercial law peers in viewing the risks associated with climate change as a corporate and securities law (rather than ‘environmental’) issue. MinterEllison has extensively advised clients institutions from the Bank of England and European Union to the UNEP Financial Initiative across the financial services sector on integrating climate risk management into corporate governance and strategy. It is expertise that we would be pleased to share as you consider the practical implications of this shift in APRA policy for your organisation’s corporate governance and risk management.
The full transcript of Mr Summerhayes' speech is available here. You will also find below links to a selection of the Alerts that MinterEllison has published on corporate governance issues associated with climate risk in recent years.
- Institutional Investment, Corporate Governance and Climate Change: What Is a Trustee To Do? (available here)
- From 'ethical' crusade to financial mainstream: is climate change reaching a tipping point for institutional investors? (here)
- Climate change beyond property damage: Prudential Regulation Authority Report emphasises applied risks for the insurance sector (here)
- A new COP on the beat – heightened expectations for corporate sustainability governance and disclosure (here)
- Straining at the Floodgates – International Developments in Climate Risk Disclosure & Litigation (here)
We have also prepared a briefing paper on APRA's new approach to climate risk governance that you may find useful to circulate to your board and executives. We would be pleased to provide that briefing paper upon your request. Please do not hesitate to contact partner Maged Girgis (Sydney) on +61 2 9921 4410 or special counsel Sarah Barker (Melbourne) on +61 3 8608 2928, if we can assist.