The Reserve Bank of Australia has issued a stark warning to financial market participants on the effects of climate risk, noting that it is critical to act now to safeguard financial stability.
In a speech to the Credit Law Conference in Sydney on Wednesday, head of domestic markets at the RBA, Jonathan Kearns, stressed that climate change can significantly affect the prices of assets if it reduces future cash flows and makes them more volatile.
“Climate change risks can manifest in different ways for different types of financial entities. If financial entities mismanage their climate risks, they are also exposed to liability risk,” Mr Kearns said.
For superannuation and managed funds specifically, Mr Kearns explained that asset valuation risk is typically borne by the investor.
“So while investment funds seeking to maximise the return for investors need to take into account the impact that climate change will have on asset prices, the trustee does not face the physical and transitional risks of climate change,” he said.
“But assessing the sensitivity of the return on particular investments to climate change is difficult, given the inconsistent and incomplete information available,” Mr Kearns noted.
Superannuation fund trustees do, however, face liability risk if they do not disclose, address and manage the effects of climate change sufficiently for their customers and owners.
As such, Mr Kearns urged financial market participants and regulators to “act now to best manage the financial risks and facilitate the associated opportunities”.
Currently in Australia, the five largest banks are conducting a Climate Vulnerability Assessment under the guidance of the Australian Prudential Regulation Authority (APRA).
This exercise, Mr Kearns explained, should assist the Council of Financial Regulators’ (CFR) work regarding the development of climate-related disclosures.
“High-quality and comparable disclosures are important to allow investors and counterparties to have confidence in how firms are managing their climate-related financial risks.
“Given firms and investors operate internationally, there is a strong global dimension to the need for disclosures,” Mr Kearns said.
Currently, the most widely recognised standards for disclosing climate-related risks are the principles created by the Taskforce on Climate-related Financial Disclosures, which are endorsed by the CFR.
But Mr Kearns stressed that while the CFR agencies – APRA, ASIC, the RBA and the federal Treasury – are working closely with international peers and financial institutions to improve the quality consistency of the information available for managing the financial risks associated with climate change, individual companies need to play their part.
Average temperatures in Australia have risen 1.4 degrees since 1910, and climate scientists are predicting that with current policies average temperatures will rise around 2.7 degrees above pre-industrial levels by 2100.
“We have seen how climate change is already affecting people’s lives in Australia and around the world, and it will keep doing so”, Mr Kearns said.
“But our actions over coming years will obviously affect the ongoing path of climate change.”
