APRA channels its inner Fisher/Carney | Sarah Barker, Minter Ellison

Sarah Barker at the Climate Alliance National Conference in October 2016 talking on the subject of fiduciary duties.

Sarah Barker at the Climate Alliance National Conference in October 2016 talking on the subject of fiduciary duties.

As was heavily covered in the weekend press, there has been a significant shift in APRA’s position on the relevance of climate change risk to the financial sector.  In a 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. 

·      The speech cites three key recent developments that have influenced APRA in articulating this view: (a) the Paris Agreement, and Australia’s ratification thereof, (b) the G20 Financial Stability Board Bloomberg TCFD climate risk disclosure recommendations, and (c) a recent legal opinion on directors’ duties with regard to climate change risks by senior commercial barrister Noel Hutley SC (briefed by Sarah Barker of Minter Ellison on instruction of the Centre for Policy Development and Future Business Council). 

·      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 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.

·      This does not mean that APRA is ‘suddenly elevating climate-related issues to the top of our priority list. But it does mean joining the wider conversation that is already going on around this issue – and being explicit that climate change is likely to have material, financial implications that should be carefully considered.’  

The full transcript of Mr Summerhayes' speech is available here.