29/05/2021

(AU ABC) Financial Regulator APRA To Stress-Test Banks On Climate Change, To Examine What Would Happen In A 3-Degrees-Hotter World

ABC News - Daniel Ziffer

Thousands of protestors gathered in Melbourne for a climate change rally on May 21. (ABC News: Billy Draper)

A key financial regulator is testing what would happen to Australia's economy if climate change creates a 'hot house world' with temperatures more than 3 degrees higher than the Earth's current average.

A tender for the Australian Prudential Regulation Authority (APRA) is seeking "climate risk modelling" on behalf of major banks, by assessing the impact on the nation's 500-biggest listed companies.

"Climate change is a systemic threat that left unchecked will undercut Australian economic growth and long-term investment returns," said Erwin Jackson, director of policy at the Investor Group on Climate Change (IGCC)."

APRA's vulnerability assessment represents a critical step in the evolution of analysis on climate change as an economic and financial risk."

The group, a collaboration of Australian and New Zealand institutional investors managing over $2 trillion in funds, said the research would illustrate the financial risks of unchecked climate change.
"No company or investor can escape economy-wide damage from climate change," he added.
Check climate

The authority's 'Climate Vulnerability Assessment' will begin to calculate banks' exposure to climate risk by assessing the physical risk to 50 of Australia's largest non-finance businesses. It will then expand to the top 500 companies.

APRA chairman Wayne Byers. The regulator he runs looks after the financial stability of banks and the overall economy. (Supplied: APRA)
"Acute and chronic physical risks expected to include a combination of some or all of the following risk types at each asset location: Extreme heat, Extreme rainfall, Extreme wind, Flooding/inundation, Fire and bushfire, Soil subsidence, Coastal inundation, and Storm," the tender documents noted.
The tender wants to know what will happen under a "disorderly transition to 2 degrees" or a "hot house world".

Neither scenario is great

In 2017, a group of central banks created the Central Banks and Supervisors Network for Greening the Financial System (NGFS) to manage systemic risks posed by climate change to the financial system.

The network defines a 'disorderly' transition as one with action that is "late, disruptive, sudden and/or unanticipated" with sharper emissions reductions needed than an orderly scenario.

Financial regulator APRA is getting serious about the risk climate change poses to the Australian economy. (ABC News: Maren Preuss)

In a 'hot house world', limited action leads to "significant global warming and, as a result, strongly increased exposure to physical risks", including irreversible sea level rises.

The scenario maps more than 3 degrees of warming, but also the impact of 'tipping points' that may be triggered if the world surpasses 2 degrees, which could create what some experts call "runaway temperature scenarios".

Despite the 'hot house world' forecasting a 25 per cent loss of global gross domestic product (GDP) by 2100, it's considered conservative and does not include "extreme events and societal changes like migration and conflict".

'Incredibly important information'

It is scary but prudent, said Daniel Gocher, director of climate and environment at the Australasian Centre for Corporate Responsibility.

"It will assist APRA and the banks, insurers and super funds it regulates to better understand the possible impacts from runaway climate change. As the last 18 months have demonstrated, Australia is acutely exposed to bushfires, floods and storms," he said.
"Understanding how the increased frequency and severity of severe heat, heavy rainfall and natural disasters will impact the largest and most exposed ASX-listed companies is incredibly important information."
The centre, a research and shareholder advocacy organisation, doesn't believe ASX-listed companies have previously assessed the risks particularly well, creating a vacuum of information for shareholders to make good decisions.

"Australian companies must move beyond the approach of believing that extreme climate change just means warmer temperatures and understanding the systemic impact it will have on society," Mr Gocher concluded.

Scenarios help planning

ClimateWorks Australia helps businesses reduce carbon emissions, to try to avoid the worst impacts of climate change.

"This is part of the global 'new normal' for financial systems," said chief executive Anna Skarbek.
"We are seeing increasing investor and regulator expectations that financial institutions are prepared for a range of climate scenarios."

Chief executive of ClimateWorks, Anna Skarbek, works with business to reduce carbon emissions. (Supplied: ClimateWorks)
The organisation finds scenarios like APRA's tender "extremely useful", Ms Skarbek said, identifying risks and opportunities.

"Our economy-wide scenarios have been drawn on by financial institutions and governments already, as they seek to understand how the financial system, and the institutions within it, would respond to various climate scenarios," she said.

"APRA's work will help normalise this and build much-needed capacity for this."

The Australian Banking Association is a lobby group that represents the interests of large banks.

Its chief executive, Anna Bligh, said local banks were working with regulators on the issue.

"Increasingly, the financial risk presented by a changing climate is a key area for consideration," she said.

Anna Bligh, the chief executive of the Australian Banking Association, said banks operate "in accordance with strict regulatory requirements both in Australia and overseas". (ABC News: John Gunn)
"Banks are also working closely with their largest customers to manage the transition to a low emissions future, as required by regulators.
"The views of investors are also critical. The world’s largest investment funds expect banks to assess and act on climate-related risks."

The tender is due by June 18.

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