Banks warned of ac­tion as cli­mate change bites econ­omy


Aus­tralia's fi­nan­cial reg­u­la­tor has stepped-up its warn­ing to banks, lenders and in­sur­ers, say­ing cli­mate change is al­ready im­pact­ing the global econ­omy, and flagged the pos­si­bil­ity of "reg­u­la­tory ac­tion".

Ge­off Sum­mer­hayes from the Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity (Apra) re­vealed it had be­gun quizzing com­pa­nies about their ac­tions to as­sess cli­mate risks, not­ing it would be de­mand­ing more in the fu­ture.

Apra also re­vealed it has es­tab­lished an in­ter­nal work­ing group to as­sess the fi­nan­cial risk from cli­mate change and was co­or­di­nat­ing an in­ter­a­gency ini­tia­tive with the cor­po­rate watch­dog Asic, the Re­serve Bank of Aus­tralia (RBA) and fed­eral Trea­sury to ex­am­ine what risks cli­mate change was pos­ing to Aus­tralia's econ­omy.

In Fe­bru­ary, Sum­mer­hayes put banks, lenders and in­surance com­pa­nies on no­tice, urg­ing them to start adapt­ing to cli­mate change and warn­ing that the reg­u­la­tor would be "on the front foot on cli­mate risk". Now, in the first sig­nif­i­cant up­date to Apra's think­ing on the topic since that speech, Sum­mer­hayes said Apra's view was that cli­mate change and so­ci­ety's re­sponse to it "are start- ing to af­fect the global econ­omy".

In an ex­tended ver­sion of a speech to the pro­gres­sive Cen­tre for Pol­icy De­vel­op­ment, and cir­cu­lated to jour­nal­ists ahead of its de­liv­ery, Sum­mer­hayes said a shift oc­cur­ring in the global econ­omy was in­creas­ingly be­ing driven by com­mer­cial im­per­a­tives - in­vest­ments, in­no­va­tion and rep­u­ta­tional fac­tors - rather than what sci­en­tists or pol­i­cy­mak­ers are say­ing or do­ing.

"Apra is not a sci­en­tific body and I can't say with 100% con­vic­tion to what ex­tent sci­en­tists' predictions of in­creas­ing tem­per­a­tures, ris­ing sea lev­els, more fre­quent droughts and more in­tense storms will im­pact the Aus­tralian econ­omy," Sum­mer­hayes said. "But what I can tell you with ab­so­lute cer­tainty is that the tran­si­tion to a low-car­bon econ­omy is un­der­way and mov­ing quickly." Sum­mer­hayes re­ported that a Sus­tain­able In­surance Fo­rum meet­ing in De­cem­ber was told that "that keep­ing the planet on track to meet the Paris agree­ment's twode­gree tar­get could re­duce fos­sil fuel rev­enues glob­ally by a cu­mu­la­tive $33 tril­lion by 2040".

"So while the de­bate con­tin­ues about the phys­i­cal risks, the tran­si­tion to a low-car­bon econ­omy is un­der­way and that means the so-called tran­si­tion risks are un­avoid­able," Sum­mer­hayes said. He noted that Apra would be con­duct­ing a sur­vey of en­ti­ties it reg­u­lated over the next few months, to find out what the emerg­ing best prac­tice was, and that there is a global trend to­wards a re­quire­ment for com­pa­nies to dis­close cli­mate-re­lated risks.

Sum­mer­hayes said Apra had al­ready be­gun scru­ti­n­is­ing the fi­nan­cial sec­tor in this re­gard and had be­gun co­or­di­nat­ing with other agen­cies. He said the reg­u­la­tor had al­ready been ask­ing ques­tions of com­pa­nies about what they have done in re­la­tion to his com­ments in Fe­bru­ary and said over time they will ex­pect "more so­phis­ti­cated an­swers, es­pe­cially from well­re­sourced and com­plex en­ti­ties".

He said the in­ter-agency ini­tia­tive cre­ated be­tween Apra, Asic, the RBA and Trea­sury would in­ves­ti­gate whether com­pa­nies are tak­ing steps to pro­tect them­selves and their cus­tomers from the phys­i­cal, tran­si­tional and li­a­bil­ity risks caused by cli­mate change.

The in­volve­ment of Asic in the ini­tia­tive is in­ter­est­ing fol­low­ing ad­vice from Noel Hut­ley SC last year find­ing com­pany di­rec­tors who do not prop­erly con­sider the ma­te­rial im­pacts of cli­mate change on their busi­ness risk per­sonal li­a­bil­ity for breach of duty. "So whether due to reg­u­la­tory ac­tion or - more likely - pres­sure from in­vestors and con­sumers, Aus­tralia's fi­nan­cial sec­tor can ex­pect to see more em­pha­sis on dis­course around cli­mate risk ex­po­sure and man­age­ment," Sum­mer­hayes said.

Mean­while, the days of green bonds be­ing stuck in a niche cor­ner of fi­nan­cial mar­kets look num­bered. A pow­er­ful tail­wind beck­ons as big global banks fo­cus on the fast-grow­ing sec­tor. Banks are in­creas­ingly selling green bonds of their own, bring­ing a fur­ther stamp of le­git­i­macy to the fledg­ling mar­ket, while also bulk­ing up their role as un­der­writ­ers in help­ing other bor­row­ers mar­ket their debt to in­vestors. "We ex­pect to see a mar­ket that is de­vel­op­ing pretty much glob­ally," says Jean-Marc Mercier, global co­head of debt cap­i­tal mar­kets at HSBC.

"The banks have been do­ing a lot of firsts there are more green as­sets in their port­fo­lio."

Last week, Bar­clays sold the first green bond from a UK fi­nan­cial in­sti­tu­tion linked to as­sets within the coun­try. The €500m deal, which at­tracted al­most €2bn of or­ders, fol­lowed other in­au­gu­ral deals for banks in the bur­geon­ing mar­ket for green fi­nanc­ing.

With to­tal green bond is­suance so far this year run­ning above $100bn glob­ally - al­ready ahead of the $79.7bn raised for all of 2016, ac­cord­ing to Dealogic data - a ma­jor ques­tion that an­i­mates the mar­ket is how to clar­ify the re­la­tion­ship be­tween the pro­ceeds of the debt and the green as­sets be­ing ref­er­enced.

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