Reserve Bank of Australia Deputy Governor Guy Debelle has given a speech which highlights the ‘scale, persistence and systemic risk of climate change’. He said that both the physical impact of climate change and the transition are likely to have first-order economic effects.

He gave two current examples of how climate is affecting the economy: investment in renewable energy sources in the Australian economy and how environmental policy decisions taken in China have had a direct effect on the Australian economy.

He also discussed the risks for financial stability:

Challenges for financial stability may arise from both physical and transition risks of climate change. For example, insurers may face large, unanticipated payouts because of climate change-related property damage and business losses. In some cases businesses and households could lose access to insurance. Companies that generate significant pollution might face reputational damage or legal liability from their activities, and changes to regulation could cause previously valuable assets to become uneconomic. All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability.

Climate risk disclosure by listed companies

In ASIC Report 593 ASIC made a number of high-level recommendations for listed companies.

It encouraged listed companies and their directors to:

• Consider climate risk: directors and officers should adopt a probative and proactive approach to emerging risks, including climate risk.
• Develop and maintain strong and effective corporate governance: strong and effective corporate governance helps in identifying, assessing and managing material risks.
• Comply with the law: s299A(1)(c) of the Corporations Act requires disclosure of material business risks affecting future prospects in an operating and financial review, which may include climate change.
• Disclose useful information to investors: specific disclosure is more useful than general disclosure. The voluntary framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) may help listed companies consider how to disclose material climate risks and what type of information to disclose. Companies with material exposure to climate risk should consider reporting voluntarily under the TCFD framework.

APRA survey

The Australian Prudential Regulation Authority (APRA) says it will increase its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change to their businesses.

Related post: APRA warns of Climate Change-Related Risks