As the impact of climate change increases, so too does the pressure on Australian businesses to prioritise climate-related risks and opportunities. In this article I review the Investor Group on Climate Change’s call for mandatory climate-related risk reporting for major corporations. I’ll also cover The Australian Prudential Regulation Authority (APRA) draft guidelines for banks, insurers and superannuation trustees on the financial risks of climate change and what the industry can do to put hazards and risk exposure management in action.
As long-term changes in climate take hold and the frequency and magnitude of extreme weather events increase, the impact and risks to Australian prudential businesses magnifies.
While the future impact of climate change can never fully be known or predicted, phenomena like rising sea levels, coastal erosion, bushfires and floods present a major risk with the potential to cause damage to assets, property, income as well as the cost and availability of insurance and tragic loss of life.
Provisional climate risks will disrupt domestic and international policies, technological innovation, social and market adaptation, which could cause catastrophic changes to costs, income and profits, investment preferences and asset viability.
The rise of liability risks too is of great concern for the long-term implications on businesses and directors’ duties as well as a heightened potential for litigation particularly if institutions and boards do not adequately consider or respond to the impacts of climate change.
Last month leading investor groups including the Investor Group on Climate Change (IGCC) of which CoreLogic is a member and the UN-backed group Principles of Responsible Investment (PRI) proposed a plan calling on the Australian Securities Exchange to introduce mandatory climate reporting as part of its corporate governance principles.
“The quantity and quality of disclosures is currently inadequate for investors to effectively respond to and manage material climate risks and opportunities, and for governments and financial regulators to address systemic risks to financial stability,” the groups said in a joint statement.
We have long supported the need for encouraging greater reporting requirements around managing material climate risks and opportunities.
But we also see the need to support the finance, insurance and government sectors in achieving new standards for greater transparency due to the highly complex nature climate hazards pose to the economy, strategy and governance.
The increase in severity and frequency of natural disasters is no longer temporary, it's close to permanent. CoreLogic is at the forefront of helping sectors meet regulatory obligations by providing data and analytics that forecast climate impact on portfolios.
MANAGING AND MEASURING CLIMATE-RELATED RISKS
IGCC and PRI’s joint report has been released a month before the Australian Prudential Regulatory Association (APRA) closes its call for submissions on its own draft climate risk guidelines.
APRA’s recommendations, released in April, heralds a renewed sense of urgency for business to understand and measure the risks, with recommendations on how to monitor risks through the use of forward-looking data.
APRA states boards should be able to demonstrate a clear oversight of climate risks and that board-level engagement is key to highlighting the importance of the issue. With sufficient insight APRA says, directors will have the ability to respond strategically to potential climate-related risks.
The prudential regulator goes on to say boards should demonstrate an appropriate level of understanding of climate risks, set clear responsibilities for senior management and hold them to account before a re-evaluation of the risks and opportunities over a short- and long-term view.
While the recommendations are self-regulating and not mandatory, APRA recommends risk monitoring of future trends should include catastrophe modelling, technology innovation and policy development.
However they warn solely relying on historical data has the potential to systematically underestimate the impacts of climate risks and advises businesses seek input from external experts such as academics, scientific bodies and specialist consultants alongside internal specialists.
PREDICTIVE CLIMATE DATA AS A RISK MITIGATION SOLUTION
APRA’s recommendations align with CoreLogic’s long-held belief that access to the right data provides a strong foundation for informed decision-making in uncertain times. Business leaders and decision makers, for example, may be better equipped to assess climate
hazards with access to comprehensive insights and credible data.
Recognising the need for independent and external expertise, CoreLogic last year formed a strategic partnership with global reinsurer Munich Re, launching game-changing insights and effective climate-related data.
The initiative allows prudential users to make more informed investment, credit, and insurance underwriting decisions, while providing a better understanding of an institution’s exposure to climate-related risks.
By leveraging the power and value of predictive climate data and information, businesses can employ a sophisticated approach to quantifying climate change impact, enhancing risk management and making informed decisions, which in turn benefits customers.
NEXT STEPS FOR CLIMATE RISK REGULATION
This is a pivotal moment for Australia’s prudential leaders to prioritise climate-related risk. Knowledge is power and if anything, APRA’s guidelines will empower institutions and provide a better understanding of the risks and opportunities, presented by climate change.
Aligned with the global recommendations set by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), APRA’s stance is an encouraging first step if Australian businesses are to get in front of the issue and reduce the chances of economic damage.
While the guide does not create new requirements or obligations, and disclosure of an organisation’s exposure is voluntary, the guidelines break down APRA’s expectations of best practice in areas such as governance, risk management, scenario analysis and disclosure.
It’s a flexible apolitical approach and encourages institutions to individually adopt a strategy depending on size, customer base and business strategy. There is no obligation or restrictions imposed on businesses but a concise and imperative missive to understand the risks and opportunities of climate change so they can make well-informed decisions now and into the future.
It’s a position we wholly support, and we encourage our clients and industry stakeholders to familiarise themselves with the guidelines and submit their thoughts before the July deadline.
APRA is seeking stakeholder feedback on the draft CPG 229 by 31 July 2021 and expects to release a final report before the end of 2021.
To find out more about how data can help identify and manage climate change risks visit: www.corelogic.com.au/products/climate-risk-solution.
Dr Pierre Wiart is Head of Consulting and Risk Management Solutions at CoreLogic Asia Pacific.