Insurers and other financial services firms have been warned that there is now “no excuse for inaction” on climate change, as there is a “high degree of certainty” that a warming climate will bring financial risks.
According to a recent paper by the Australian Prudential Regulation Authority (APRA), only one in five companies were meeting voluntary climate risk disclosure targets set out by the Task Force on Climate-related Financial Disclosures. And while all the general insurers, banks, and super funds were found to be actively doing their part to understand climate risk, only 60% of private health funds and 40% of life insurers said they were doing so.
“Climate change and society’s responses to it are now widely recognised as foundational drivers of risk and opportunity within the global economy,” APRA said, adding that this had “implications for APRA’s mandate to protect the Australian community” by ensuring companies were addressing the risks, The Australian Financial Review reported.
“APRA has advised regulated entities that, while the implications of a changing climate will have a long-term impact and the time horizon for the risks can be uncertain, this does not justify inaction,” the report said. “There is a high degree of certainty that financial risks will materialise, and entities can mitigate the magnitude of the impacts of these risks through action in the short-term.”
The report found that just a third of the 38 APRA-regulated companies surveyed saw climate change as an immediate risk rather than a future risk. This was reflected in the risk categories of most concern, with companies most worried about reputational risk – i.e. about public perception that they are not doing anything to mitigate climate risk. This was followed by flood risk, then regulatory, cyclone, energy, and bushfire risks.
Half of general insurers said they were already feeling the effects of climate change, the highest of any sector.
Meanwhile, a minority of the respondents, including 20% of life insurers, said climate change would pose no material risk. Life insurers also had “identified no specific employee responsible for climate-related financial risks.” This was in contrast to banks, super funds, and general insurers who had a clear idea who in the business was responsible for climate change policy.
The prudential regulator did not identify what climate risks life insurers face, and the Australian life insurance industry has done little work on the risks itself. Unlike general insurers, the balance sheets of which can be impacted by unexpected weather events, neither life nor health insurers are obviously exposed to the physical risks of climate change. As with banks and super funds, the risks come more in the investment rather than the underwriting side of the business, AFR said.
When asked about the opportunities of climate change, the respondents identified product opportunities – including low carbon products and services – and investment opportunities, particularly in renewables and green bonds.
APRA said it would not yet introduce specific climate-related prudential standards and instead will rely on its existing prudential framework and will be “embedding the assessment of climate risk into its ongoing supervisory activities,” AFR reported.