A bank’s or insurance company’s exposure to the housing market, which might face risks from sea level rise, and to climate risk via their loan books, including via physical impacts to houses on their mortgage books, is considered by Geoff Summerhayes of the Australian Prudential Regulation Authority as a key climate-change induced major or material financial risk to the bank or insurance company and a risk that is actionable by shareholders.
“The potential exposure of banks’ and insurers’ balance sheets to real estate impacted by climate change” may be risks that are “foreseeable, material and actionable now” (Summerhayes, February 17).
While much of the early focus on these risks has been on insurance firms and their exposure to losses from increasingly frequent and severe natural disasters, it is now understood that there are a variety of other potential issues. Other potential issues include the potential exposure of bank’s and insurers’ balance sheets to real estate impacted by climate change.
A case has been filed on 7 August 2017 against Australia’s largest bank, the Commonwealth Bank of Australia that is the first anywhere in the world to test in court how companies are required to disclose climate change-related risks in their annual reports. The case, filed by bank shareholders, claims that the bank’s 2016 directors’ report did not adequately inform investors of climate change risks and seeks an injunction to stop the bank making the same omissions in future annual reports.
A part of the claim focuses on the Commonwealth Bank not disclosing any climate-related risks as major or material risks. “When the bank talks about major or material risks to the bank, we say it should be talking about climate change,” said David Barnden, a lawyer at Environmental Justice Australia who signed the claim on behalf of the applicants.
The Commonwealth Bank of Australia might face diverse risks as a result of climate change. “CBA has exposure to the Australian economy in general. We could be talking about anything from extractive projects to the housing market, which might face risks from sea level rise,” said Barnden.
The case follows a key speech given in February by Geoff Summerhayes of the Australian Prudential Regulation Authority at the Insurance Council of Australia’s annual forum in Sydney. Mr. Summerhayes said that climate change poses both a physical risk and a transition risk for Australian companies.
“The terminology I would like to adopt now, consistent with the FSB Taskforce, is physical and transition risks. I won’t bore you with definitions, but for the sake of clarity:
- “1. physical risks stem from the direct impact of climate change on our physical environment – through, for example, resource availability, supply chain disruptions or damage to assets from severe weather.
“2. transition risks stem from the much wider set of changes in policy, law, markets, technology and prices that are part of the now agreed transition to a low-carbon economy.”
Business, he said, needs to stop reporting on climate change as a purely ethical or environmental issue and begin seeing it as a financial problem. He said: “Like all risks, it is better they are explicitly considered and managed as appropriate, rather than simply ignored or neglected.”
“While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem,” he said on February 17.
“To begin with a generalisation, while climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem.
“The key point I want to make today, and that APRA wants to be explicit about, is that this is no longer the case. Some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.”
“I think the days of viewing climate change within a purely ethical, environmental or long-term frame have passed. More and more, the conversations we are having are about the practical realities and consequences of a changing climate. One reason for this is that we now have a much more sophisticated, granular, quantifiable understanding of the impacts, risks and probability distributions around climate change. This is true on the planetary scale.”
See:
“Concise Statement” | Guy Abrahams (and another), Applicants, Commonwealth Bank of Australia, Respondent, signed by David Barnden, Lawyer for the Applicants, 7 August 2017.
“Commonwealth Bank shareholders sue over ‘inadequate’ disclosure of climate change risks” | Michael Slezak, The Guardian, 7 August 2017
“Apra says companies must factor climate risks into business outlook” | Gareth Hutchens, The Guardian, 17 February 2017
“Australia’s new horizon: Climate change challenges and prudential risk” | Geoff Summerhayes, Executive Board Member, Insurance Council of Australia Annual Forum, Sydney, 17 February 2017
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