APRA warns on climate change risks

Guest post from Kate Mackenzie of the Climate Institute.

APRA’s Geoff Summerhayes on Friday delivered a whole speech entirely about climate change risk at the Insurance Council of Australia conference on Friday. It’s the first time any of Australia’s financial authorities have so clearly addressed this topic (although many of their international peers have been doing so almost two years).

So, why now? And what does it mean for the Australian financial sector?

It’s mostly explained in the speech itself. But if you find speeches TL;DR, here are some key points.

Firstly, a few key developments in the past couple of years have led to climate change being seen as a foreseeable financial risk:

  • The Paris Agreement: the implications of this agreement are that the world must achieve zero net emissions by about 2050; that’s what’s required to keep warming to below 2C. This means big and potentially rapid changes are likely, not just for fossil fuel producers, but also the many other sectors that rely upon them.
  • Consumption of thermal coal has fallen more quickly than almost anyone predicted, as has the price of renewable power.
  • A huge factor is new awareness of director liability risk arising from climate change . In October, Noel Hutley SC published a memorandum of opinion called “Climate Change and Directors’ Duties“. A very brief, non-legal summary: climate change and related transitions are mostly quite “foreseeable”, directors who can’t show they have considered and acted on this risk may be exposed to claims that they’re not doing their duties. The Hutley piece is worth reading in full, and there’s more here if you’re interested in the director implications.
  • The Financial Stability Board’s Task force on Climate-related Financial Disclosure – aka the FSB climate taskforce or TCFD. This industry-led task force is modelled on an earlier FSB initiative (the Enhanced Disclosure Task Force) to get global systemically-important banks to disclose their risk in a more consistent, comparable way, with the objective of markets pricing risk better and thereby reducing systemic risks. Australian banks were not overly concerned with the EDTF, due to the domestically-focused nature of the industry here, but the same can’t be said for climate risk. The draft climate recommendations were published in December; they will be finalised over the next few months. Through my work I am already hearing of Australian investors asking companies how they plan to disclose in line with the recommendations, and and large companies of different sectors are starting to think about how to they will do this.

So, back to Summerhayes’ speech.

Firstly, it’s not just about insurers (although reading The Australian’s report on the speech, you could be forgiving for getting that impression). Summerhayes clearly mentioned banks, asset managers and asset owners in his speech. In fact, he noted that while the “early focus” on climate risks tended to focus on catastrophe losses to insurers, there are now “a variety of other potential issues”.

  • These include the potential exposure of bank’s and insurers’ balance sheets to real estate impacted by climate change and to re-pricing (or even ‘stranding’) of carbon-intensive assets in other parts of their loan books. They also include exposure of asset owners and managers – an important consideration given the size of Australia’s superannuation sector and its heavy weighting towards carbon-intensive equities and a relatively resource-intensive domestic economy.
  • Importantly, Summerhayes addressed all key types of climate risk as identified by the Bank of England in late 2015. They are:
    – physical risk around the effects of climate change;
    – transition risk around the risks associated with shifting towards a zero net emissions economy- liabililty risk which can arise from either of the above risks and has particular importance to company directors, trustees, and insurers (but also can affect others).

So what is APRA going to do?

Speeches from financial regulators in Australia matter, a lot: they are used to send a message to relevant industries and entities. Any speech by an APRA official will have been written in consultation with, or with approval of, the other APRA Members and senior executives. Summerhayes said he had been discussing the matter with his colleagues for about 12 months now.

No specific measures were announced in his speech – again, the speech itself is a tool of supervision. However he gave a clue of the sorts of things financial institutions can look forward to:

Scenario analysis as the new normal

Practice and expectations are moving beyond mere documentation of static metrics. Robust, scenario-based thinking about risks should be the new standard for risk management. Markets and investors expect to see evidence of more sophisticated analysis to identify risks and strategy for managing them. The questions investors (and regulators) will want answered are not just about “what” but “how”. How do you model and identify relevant trends, opportunities and risks?  How robust are your strategies given different scenarios and contingencies?

He also talked about stress-testing:

So what can you expect to see from us? Firstly, something you would already be aware of is a greater emphasis on stress testing for organisational and systemic resilience in the face of adverse shocks. It could be the case that, just as we would expect to see more sophisticated scenario-based analysis of climate risks at the firm level, we look at these risks as part of our system-wide stress testing.

This effectively puts financial institutions on notice: if you haven’t already been asked about how you’re dealing with climate risk, you will be. And you’ll need a solid answer. It’s not like climate change is going away.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Lol, nice work APRA – seeing and analysing third order effects of climate change as they roll through insurance claims experience.

    Remarkable they can see past the humongous elephant that is also in the room!

  2. “No specific measures were announced in his speech”.

    And there you have it. Paris is non-binding. Trump is in the Whitehouse and will re-write the agenda. China is building hundreds of coal plants. Japan its fair share too. Climate change predictions have failed on scale. Even Warren Buffett only sees climate change as an area for insurers to make good dough.

    • “A huge factor is new awareness of director liability risk arising from climate change”

      You guys who are getting paid to knowingly spread lies and doubt about climate change might want to take note of this. You might want to ask for more money to cover for liability and prosecution 🙂

      The climate models (predictions) have been accurate – so have not failed.

    • FE, perhaps I assumed too much prior understanding among the M B audience of how prudential supervision works. They use speeches to publicise which matters they will be scrutinising and why. Read the speech; it makes clear they will be and indeed probably already are asking how supervised entities are managing this type of risk. In general that’s’ how it works; speeches, direct conversations etc – and if they don’t get comprehensive or satisfactory answers, they step up a notch.

      • You are way too optimistic Kate. The paradigm has shifted. Bureaucrats are not leading indicators, Summerhayes already sounds out of touch.

        Good luck getting any director liability for a climate related charge to stand up in court. Trump is going to break the Big Stick of climate change and revel in the CO2 induced outbreak of Carrot abundance.

    • FE appears to be the latest incarnation of our mining troll, a man with no morals or wit, completely unshackled by logic or facts. In other words, a payed-by-the-word troll.

  3. Between this and the RBA talking about the need to re-focus on their gender targets (after Phil Lowes daughter scolded him) – i think its safe to say the nations regulatory bodies are not entirely focused on the primary job at hand!

  4. So what happens when the climate continues not to behave the way their simplistic models predict? Do the insurance companies apologise and return the premiums?

    Before I set off to Melbourne with my family in October 2009, all my friends in the UK were shaking their heads at my “foolhardiness”. A topical piece of news at the time was that Victoria was in a drought that was to have no end – because of “Climate Warming”. Well, that prediction like a great many others seems to have been forgotten. Of course, Victoria’s taxpayers will continue paying for a great many years for the white elephant of a desalination plant.

    California was supposed to also have an everlasting drought. It seems they neglected their dam-maintenance. Really smart!

    Sunday had the coldest day in February for 12 years in Melbourne – 18 years for Frankston. Perth broke its 130 year coldest day record a week ago. Last September was the coldest on record for Perth so that was not a one-off.

    This has all the hallmarks of an American scam. Just like Korea, Vietnam, the Cold War, the War on Poverty, the War on Drugs, 9/11, the War on Terrorism, the bombing of ISIS and all the rest of that BS. Lots of money to be made by insiders though.

    • indeed. And if global warming was on and sea rise too, why no mention of that? Parts of Melbourne CBD would be underwater, train links too by 2090.
      By 2049 definite problems would be showing.

    • Well, that prediction like a great many others seems to have been forgotten.

      Can you reference some peer-reviewed science stating the drought would “never end” ?

      Sunday had the coldest day in February for 12 years in Melbourne – 18 years for Frankston. Perth broke its 130 year coldest day record a week ago. Last September was the coldest on record for Perth so that was not a one-off.

      What do the fifty-year trends for the lowest temperature in the months for those cities look like ?

    • Terror Australis

      And if the Global Warming claims of “so-called” climate experts is real, why do i still have ice in my whiskey glass? Pfft ?

    • You really have no idea Alfred . EG: while Perth had an amazing cold day in summer recently much of the east sweltered in record high temps at the same time. Local weather vs global climate trends Alfred. There’s a big difference.

  5. Anyone who believes that the price of renewable power has fallen is delusional. Take the case of South Australia. The cost of renewables is shutting down of the economy – that is very expensive. If anyone had done any modelling of intermittent generation into the national grid ahead of policy changes they would have not contemplated it.

    The cost of Climate Change is going to be more about the inept policies, trying to reduce carbon, causing uncalculated harm to economies than any impact of Climate Change. You never read a report on Climate Change or Global Warming that is not qualified by words such as “might” or “likely”. It is a mirage. It morphs to suit the circumstances. It is near freezing in Melbourne today that is caused by Climate Change. Extreme weather in South Australia is now defined as weather that causes the turbines to trip on safety override or households to turn on air-conditiuoners. I bet insurance premiums ail rise in South Australia as a consequence of rolling power outages. For sure Alcoa will have higher premiums. These increases have nothing to do with Climate Change but rather ineffective, damaging policy trying to fix the weather.

    Think about it – you are waiting for surgery but the surgeon has to check the weather forecast to make certain the wind is going to blow today before he opens you up. This is actually laughable. You can no longer cook at night because the sun is not shining. Modern society needs electric power on demand NOT as the wind blows and the sun shines.

    Storage cannot save the day. It is needed in such vast quantities to make any dent that, however it is supplied, it will stress the respective supply chains and prices will be beyond spectacular. Keep the dispatchable generators fired and idling so they can power up as soon as needed – how does that reduce carbon dioxide?

    No one has thought through these policies that are intended to save the world by changing the weather.

    The naivety around this to

    • Anyone who believes that the price of renewable power has fallen is delusional. Take the case of South Australia. The cost of renewables is shutting down of the economy – that is very expensive.
      …..The naivety around this”

      Have you not seen the cost of Global Warming? Can you not calculate what it will cost Australia alone? Insurance payouts for natural disasters doubled in 2016. We are barely at a 1C rise in temperature. Can you not comprehend the cost to the economy to rising waters, increased fires and floods? Do you know the numbers of Australians who die from heat stroke? Can you not see the cost to our economy in farms shutting down due to changes in rain patterns and increased heat?

    • Err, SA generators are all private enterprise. SA Government is not telling them what to do. They are making commercial decisions on generation type, as they are entitled to do.

      What are you? Some sort of Commie Marxist? If they run out of power, that’s the invisible hand of the market being efficient. If you don’t like it, go somewhere else, or generate your own power. Don’t expect the nanny state to look after you. Isn’t that Coalition philosophy?

      • emess
        You clearly did not read the link in my post. If you did you would know I operate both on-grid solar systems (to get the 66c/kWh FIT from early adoption) and an off-grid solar/battery system to maximise my export. Like the private intermittent generators in SA I make a killing from the government subsidies that support the renewable rort.

        However I have no illusion that anything I do or the intermittent generators in SA are doing is lowering CO2 production. The grid cannot rely on these intermittent supplies so the dispatchable generators have to be fired up and on line ready to accommodate the swings in renewable supply.

      • I’m not sure what your point is. I was merely pointing out that generation decisions are totally in the hands of the private sector and the market. So, presumably, that’s where the decisions are being made. FWIW I think subsidies of all sorts should be eliminated, including free emissions of CO2. If it can’t be taxed, let it be captured…at generators’ cost.

      • Rick: “I make a killing from the government subsidies that support the renewable rort.”
        You sound like a sad, bitter man to be honest.

      • emess
        If you are buying electricity in Australia you are being taxed directly through LGCs to pay for renewable energy. It is nothing like a free market. Wind and solar power generation into the grid could not exist without LGCs. In fact the latest schemes include direct government support as well as the LGCs.

  6. Raise insurance premiums, deny cover on coastal areas, etc.

    This is distraction from the big systemic risk: debt.

  7. “You’d have to be pretty gullible not to realise that there is no way we can change the Planets temperature.”

    How would you come up with that conclusion? So if we chopped/burned down every tree and melted most of the ice on the planet it would not change the planet’s temperature? We have mulitple examples of how we have changed the planet by our activities (hole in the ozone layer, acid rain) – why would we not be capable of changing the temperature?

    I think you have been added to my list of (with Alfred) ‘does not comprehend basic high school science’.

    Here is something that may help you understand.
    – Try to work out why it gets hot inside a car on a cold sunny day.
    – look into CO2 and greenhouse effects
    – look into how humans have been releasing CO2 into the atmosphere and what that would do (armed with your knowledge of why it is hot inside a car on a cold sunny day.)

    • glamb
      If I removed all the CO2 in the air inside a car it would be the same temperature as one with CO2 in the air. So CO2 makes no difference to the temperature in the car.

      Greenhouses have added CO2 to accelerate the plant growth not to increase the temperature. The ventilation is adjusted to control temperature by allowing more or less heat to be removed through the latent heat from the water evaporation off plants and other moist surfaces.

      • I am not sure if you are trying to be funny or you really have no idea as to what “CO2 is a greenhouse gas” means (which would be funny as it underpins AGW).

        The glass in a car has a glasshouse effect (allows light into the car which heats up the surfaces, the surfaces radiate heat into the air, the glass does not allow the heat to escape, so it get hot inside). CO2 in the atmosphere has the same effect as glass – it allows light in but traps heat (yes, proven fact).

        You are confusing CO2 in the process of photosynthesis which has nothing to do with the properties of CO2 as a greenhouse gas.

      • glamb
        You have been hoodwinked believing this nonsense. Climate modellers do not come close to approximating how radiative gases work in the atmosphere. If they did they would NOT be simply extrapolating from past data to make forecasts. They have enough fudge factors that they can hind cast simply by curve fitting. They are useless for forecasting. The early models derived a CO2 sensitivity from the 1970 to 1990 correlation. As time has moved on the sensitivity is reducing. On the present, by 2025 it will be the sensitivity will be negative.

        This is from the modellers:
        “Many of the disagreements among global climate model predictions have been traced to how the models represent these low clouds,” Mechem said. “You can think of low clouds as the climate’s refrigerator. They’re very bright and reflect sunlight back to space, so there’s a cooling effect from these low clouds. It’s fairly obvious in a changing climate we need to know if they’re going to increase or decrease. If we get more low clouds, they might lessen warming. If they go away, that might amplify warming.”
        This was written in 2017. It is asking for more money to determine how clouds behave. If they knew would the want more money. None of the models come close to accurate cloud behaviour. Without that they are useless.

        If you think you know something about climate, can you please explain to me why the dry land around the Dead Sea is 400m below the level of the oceans. Where has all the water gone and why?

      • The Dead Sea sits within the Jordan Rift Valley. There is next to no water in the Jordan River due to irrigation and the damming of Lake Kinneret, hence declining inflows to the Dead Sea. It continues to lose water due to evaporation. That’s where all the water is going. It has nothing to do with clouds or models.

      • Clouds is just another distractor – it has a small effect:

        Models don’t prove or disprove AGW. All models are wrong, some are useful. The IPCC prediction models have been within their tolerance levels.

        There is a direct correlation between warming and CO2 levels. Can you show any other correlation?

        Hoodwinked by the Scientific Method? If Climate Science does not work then the Scientific Method does not work. The Scientific Method does not miraculously work for physics and medicine, but not for Climate Science. You are either a paid for comment, or someone who failed Year 9 science.

      • ‘The data doesn’t give me the answer I want, therefore it must be wrong.’

        Broken Hill hasn’t grown for a century and doesn’t have air conditioners or cars ? Who knew ?

        The upward trend of the last century and especially the last half century is apparent to a Mk1 eyeball even on your (presumably) cherrypicked examples.


      • @RickW-MB – Cherry picked 2 data points in your favour when there are hundreds of thousands of independent indicators of the earth warming.

        Are you seriously saying that the earth is not warming? Really? By picking 2 data points. And both of those graphs have only had 1 year below average at one location in the last 20 years!!!

      • glamb
        The data is not cherry picked – they are examples to encourage you to do your own research of the facts rather than believing the scare mongers.

        The globe has warmed in the last 60 years:
        by a minuscule 0.236C. The warming over this period continues the trend that goes back to the 1700s. It is not accelerating, which the inept climate models predict it should be.

      • AlexD
        If you think that mickey mouse experiment can in any way replicate what is going on in Earth’s climate system you are a hopeless case.
        No one here has any clue why the land around the Dead Sea is 400m below ocean level. When you understand that, and can explain it, you have some clue to how the climate system works.

  8. Looks like the MSM Nazis censorship is alive and well at this site.
    Posts that deny Climate Change WILL (and have been) be deleted. Wankers !

  9. If you want to reduce the human footprint, surely the best place to start would be with beginning to dismantle the MegaCities. Big cities no longer produce enough to justify their consumption. People in hi rise buildings can’t easily go offgrid or produce their own food. The little apartments are poorly designed to require artificial heating and cooling. All that just sucks energy. Worse, the economy is held together by consumption of things that waste more energy and resources. More and bigger cities is the opposite of what we need. Even “green” people seem to want a zero emissions future built around MegaCities!

    We are facing a future where traditional employment is declining. Wouldn’t it make sense for more people to live outside the cities and be effectively self-employed at being self sustaining? Building viable rural communities would take decades, but if it halted the growth of Sydney/Melbourne, wouldn’t it be worth it? Why couldn’t we aim for 50% or more of people living outside the big cities? I have spent a lot of time in Sydney, and I can’t seem to locate this magic fairy dust that makes it essential to life.

    • Your scenario is not a binary. You can have more small and medium-sized cities connected by adequate infrastructure. Going rural is just not tenable with 7 billion people.