It's taken some time to declare, but the Australian Prudential Regulatory Authority (APRA) has now officially stated its position on climate risk: it matters.
Banks, insurers, and superannuation funds must calculate financial risks associated with climate change, and systematically monitor, disclose, and discuss the risks as part of their obligations.
Many organisations have welcomed the move, since a failure to calculate the financial risks of climate change is not in anyone's best interests. APRA made a statement, saying that assessing the risks of climate change was an 'important and explicit' part of its agenda.
Geoff Summerhayes, an APRA member, spoke at a forum recently, explaining that APRA sees climate risks as foreseeable, and risks needed to be evaluated properly, even if they turned out to be deemed small. The value was in the considering, not only of financial institutions, but of investors.
Greater stress testing, Summerhayes said, would be on the cards, to evaluate resilience in the face of shocks, considering how big Australia's superannuation system is and how weighty the carbon-intensive equities market is in a resource-heavy economy.
APRA separates physical and transition risks. Physical risks arise from climate change affecting things like weather, whereas transition risks come from policy, law, markets, technology and prices.
Summerhayes reiterated: 'We make no apologies for expecting regulated entities to rise to this challenge with us. These are shared responsibilities. When things go wrong, it reflects badly on all of us – regulators, entities, governments and the entire financial ecosystem.'