Geoff Summerhayes, executive board member of APRA, has spoken on the momentum towards preparing for climate change among financial institutions and regulators.
“We are on the verge of the next industrial revolution and that’s the industrial revolution to a low carbon future,” Mr Summerhayes said, speaking at the Australasian Emissions Reduction Summit.
Mr Summerhayes’ five-year tenure with APRA will soon come to a close, but he anticipates that net-zero emissions by 2050 are set to become the standard by which stress testing is conducted. The shift will be driven not by regulators, but by the market.
He also believes the transition to a lower-carbon economy will be accelerated by the flow of capital.
“There are billions and trillions of dollars globally at stake in this transition,” Mr Summerhayes said.
“And so this has been driven by economics and it’s being driven by the weight of money so I think we will find that this will move much quicker than everybody is anticipating and where there are gaps in pricing risk, there is a business opportunity for somebody to close that gap, when there are literally trillions of dollars at the stake.
“I think a lot of people will be left stranded if they’re not attuned to what’s going on.”
Finance key to transition
Mathew Nelson, leader for climate change and sustainability services at EY and member of the Task Force on Climate-related Financial Disclosure (TCFD) forecast the changes likely to occur in the next few decades.
To achieve 1.5 degrees of warming, between 2030 and 2040, the transportation sector will need to shift, forgoing liquid fuels that are fossil fuel based within a 10 to 15-year period.
The energy sector will be supplied by non-fossil fuel-based power generation, while manufacturing will need to transform. Meanwhile the carbon sequestration sector is expected to grow, to perhaps as large as the energy industry between now and 2050.
“It’s that type of discussion about what type of flow of capital and the transforming of capital from here to there in order to get that to happen,” Mr Nelson said.
“That’s where finance really needs to start to open its mind to the fact that that’s likely to happen. And so I think that’s why we need to get that process started.”
The finance sector will pick the winners and losers of the transition process. Investors who get ahead of the market, who can time the movements will be able to “make all the money”.
“Those that move quickly, those that may take their own orderly transition paths, look at their own assets on an asset by asset basis to say, I need to move away from that and I need to move towards that – those who do that in an orderly fashion are going to be the winners,” Mr Nelson said.
Still a way to go on disclosure
APRA had surveyed 38 of the largest superannuation funds, banks and insurers, finding that while progress had been made in governance and risk management strategy, climate disclosure metrics and targets were the weakest components.
The prudential regulator is working on embedding climate risk into stress testing with the banking industry, having previously signalled the standards could be extended to other sectors.
As pointed to by Mr Summerhayes, regulators and investors alike currently share a struggle around a lack of standards for measurement, taxonomy, stress testing scenarios and modelling. Climate risk disclosure and the standards around it are “not where it needs to be”.
“It’s very difficult to forecast the future at the best of times, but when we’re dealing with natural systems and how they’ll play out and the impact that will have on the real economy, is that this is a highly complex problem,” Mr Summerhayes said.
“How do we get a global set of standards, in which we can have an appropriate market level, firm-level disclosures, so we can price risk?”
Australia is one of the highest performing regions in emissions reporting, according to Jen Driscoll, chief executive for AllianceBernstein in Australia, but globally, disclosure can be a hit-or-miss.
“For us, when we look at the critical benefit of TCFD, it’s really to get more companies to report globally and to be able to get those insights,” she said.
“And it’s certainly critical for us a firm as we look to roll out further product development in the space of low emission strategies in regions outside of Australia as well.”
Ms Driscoll commented she sees company disclosure continuing towards having more detail and painting a more complete picture.
“We’re finding that as we being invested into strategy sessions with these corporates who, as we’ve acknowledged, the whole industry is going to be grappling with this for quite some time,” she said.
“This is an incredibly complex aspect for any of us to continue to analyse, given it is forcing us to look out not just in the medium term, this is a 20-30 year view.”
