Mandatory climate risk disclosures are coming to Australia

Mandatory climate risk disclosures are coming to Australia | Insurance Business Australia

Mandatory climate risk disclosures are coming to Australia

Australia’s insurance industry can expect an acceleration in climate risk reporting and sustainable finance obligations in 2023. In December, the federal government announced the start of a consultation process that would lead to mandatory climate-related disclosures.

Allianz and IAG (Insurance Australia Group) together with the country’s biggest banks issued a joint statement supporting the government’s climate friendly moves and accepting the financial sector’s “critical role” in this transition process.

“They’re [Australian insurers] not starting from a dead stop but definitely there’s a lot of work to do in terms of really building out the kinds of fully integrated and robust approaches that we need to see across the whole insurance sector,” said Emma Herd (pictured above), climate change and sustainability services partner for the global professional services company EY. Her firm also signed the joint statement.

The European example

However, Sydney-based Herd encouraged local insurers to look to Europe for examples of more robust approaches for building out their climate risk reporting.

“I think the fundamentals are all there but the level of sophistication and the ways in which the tools are being applied is at another level in Europe compared to many of the insurers in Australia,” she said.

Read next: Net-Zero Insurance Alliance releases target-setting protocol

Herd said a “really good example” can be found in the underwriting standards of European insurers and their preparedness to progressively phase out the provision of underwriting services to fossil fuel companies.

“I think in the Australian context, where that preparedness to make those sorts of commitments probably is a reflection of the politics, but also a reflection of the Australian economy - that has been a bit more subdued,” she said. “Even though they recognize the same risks and are subject to the same pressures and forces.”

Herd also pointed to the more sophisticated application of scenario analysis in risk-based pricing used by many European and some Asian insurers compared to Australian counterparts.

“I think in the Australian context we still tend to take a very reactive approach to risk pricing that’s based on disasters, rather than resilience to the future increasing frequency of disasters, if you think about climate, for example,” she said.

“Step change” needed for climate risks reporting

Herd said Australia would need to make a “step change in terms of approach” to reach European levels of response and commitment to climate reporting and sustainability.

In November, the Insurance Council of Australia (ICA) released a climate change roadmap for the industry: “Towards a Net Zero and Resilient Future.” The roadmap’s purpose is to help insurers achieve net zero emissions for their operations by 2030 and across their activities by 2050.

However, some financial services firms have set stronger targets, including EY, which committed to net zero by 2025.

“The insurance industry, I think, has a much bigger role in terms of advocacy, and advocacy around policy and customers, which I think the sector is starting to do well, and the roadmap does commit to doing more in that space,” said Melbourne-based Terence Jeyaretnam to IB during an interview in November about the ICA’s roadmap.

Read more: Does the ICA’s climate change roadmap go far enough?

Jeyaretnam  is EY’s APAC leader and partner for climate change and sustainability services. He suggested that the roadmap is a positive start that could be falling short.

“I think the insurance industry has a really unique role to play because they are the risk transfer safety net that every other part of the finance sector and every other part of the economy is relying upon to deal with the financial implications of so many of these sustainability issues,” said Herd.

She said while major insurers in Australia have been involved in sustainability initiatives to varying degrees for years, it’s only during the last couple of years that there has been “a real surge in response.”

One example of this surge, she suggested, is insurers who are members of the Australian Sustainable Finance Institute (ASFI).

Is Australia about to implement mandatory TCFD regulations?

In November 2020 the ASFI launched a roadmap for the financial services industry geared towards reshaping the financial system and also transitioning to net zero by 2050. The roadmap included guidance to support TCFD (Task Force on Climate-related Financial Disclosures) aligned reporting. The TCFD’s regulatory framework is now used in the European Union, Singapore, Canada, Japan, South Africa, New Zealand and the United Kingdom.

Herd said 2023 should see Australia join this group.

“I think that’s extremely likely,” she said. “Treasury announced the consultation process in mid-December and submissions are due in mid-February.” Herd said the government will likely phase these climate related financial disclosures in for FY24.

“I think that there’s an extremely high likelihood that we will be seeing mandatory climate disclosure and probably broader sustainability disclosure for the large companies in Australia, including the financial services sector,” she said.

However, Herd also noted that local regulators are also “tightening expectations” around the “unique role” of the financial services sector in relation to climate change expectations.

“You’re seeing it in terms of the prudential oversight expectations of APRA (Australian Prudential Regulation Authority), the stress testing and the climate vulnerability assessment work that they’ve done with the banks now coming over to the insurers as well,” she said. “You’re also seeing it in terms of the disclosure expectations of ASIC (Australian Securities and Investments Commission) and even the ACCC (Australian Competition and Consumer Commission) on a product basis.”

“All of the regulators are tightening the screws,” she said.