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Warnings & Opportunities for Financial Institutions in managing Climate Change Risks

  • Market Insight 11 May 2021 11 May 2021
  • Asia Pacific

At a virtual Summit on the climate crisis hosted by the United States on 22 and 23 April, Prime Minister Scott Morrison reaffirmed Australia’s position in relation to its commitments under the Paris Agreement. Australia will aim for a reduction of between 26 to 28 per cent on 2005 levels of greenhouse gas emissions by 2030. This is in circumstances where there are calls from the Biden administration for countries to join the United States in cutting greenhouse gas emissions faster than originally planned.

The Prime Minister’s announcement of an over $4 million investment in regional hydrogen hubs and carbon capture and storage projects ahead of the Summit confirmed that Australia’s approach to climate change mitigation remains “technology rather than taxes”. This provides unique opportunities for businesses and financial institutions alike. Speaking at the Committee for the Economic Development of Australia earlier this week, Australian Prudential Regulation Authority (APRA) Chair, Wayne Byres shared this sentiment and noted that “an understanding of the impacts of climate change should equip the financial sector to grasp the business opportunities that a changing climate will generate, as new investment is needed, new technologies emerge and economies and new businesses grow.”

Byres’ statements were made in relation to the new Draft CPG 229 Climate Financial Risks Guidance published for consultation by APRA on 22 April 2021 (Draft Guide). The Draft Guide is aimed at banks, insurers and superannuation trustees to assist these entities to identify, monitor and manage any climate change risks, make well informed investment decisions and to identify opportunities through their existing risk and governance structures.

Developed in response to requests from the industry for greater clarity of regulatory expectations and examples of better industry practice, the Draft Guide is aligned with the recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The Guide is a timely addition as the TCFD recommendations will soon be mandatory in some sectors in the UK and New Zealand which could have impacts for Australian companies doing business in these jurisdictions.

The Draft Guide covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure and in particular:

  • in respect of governance, provides for key roles for members of the board and senior management to ensure that “work on climate risks holds sufficient standing within an institution, and gives the board the requisite institution wide insights to strategically respond to the risks.”;
  • with regard to risk management, submits that institutions have to have in place arrangements to identify, measure, monitor, manage and report on its exposure to climate risks;
  • as regarding scenario analysis, APRA is expected to share lessons learned from its ongoing climate vulnerability assessment involving Australia’s largest banks later this year; and
  • in relation to disclosures, APRA notes that in addition to complying with all statutory and regulatory disclosure requirements, institutions should consider making further voluntary disclosures (for example within the TCFD framework) to improve stakeholder confidence in the resilience of the institution to climate change risks.

The Draft Guide is not prescriptive and is designed with flexibility in mind, to allow institutions to adopt an approach that is not only appropriate for its size, customer base and business strategy but one that is well informed and one that appropriately considers the risks and opportunities that the transition to a carbon neutral economy creates.  

In terms of liability risks, the Draft Guide notes that institutions and boards may face regulatory enforcement risks and litigation if they do not adequately consider and respond to the impacts of climate change. This is consistent with the latest update to Noel Hutley SC’s seminal guidance on climate risk disclosure dated 23 April 2021 (Opinion).  The Opinion notes that companies and directors could be sued for “greenwashing” commitments to achieve their net zero carbon pledges or emission reduction targets without having credible plans to achieve them. There may also be liability under the Corporations Act 2001 (Cth) for misleading or deceptive conduct.

Reflecting on the legal landscape following the settling of the landmark court case involving Rest Super[1], the Opinion warns that trustees of superannuation funds cannot rely on external investment advisors to discharge their legal duties, but must inform themselves of the risks posed to their fund by climate change, including by consulting advisers with sufficient expertise in climate risk.

The Opinion and Draft Guide recommend that where climate risks are too great for a particular investment, boards or trustees must consider divestment or reallocation of funds to meet their duties to members or shareholders.

These warnings should not be taken lightly, given credit rating agency Moody’s warning to the bank sector recently that their credit ratings will take a hit if financial institutions fail to adapt lending policies to reflect climate threats.

Ultimately, while the Guide provides industry best practice and helps industry understand the impacts of climate change, Byres maintains that the ultimate responsibility lies with the board of directors of financial institutions “to understand where, how and to what extent those risks will impact their business and to consider how they should respond”. Although the paths that different financial institutions may take will be varied, it is agreed that an improved understanding of the impacts of climate change will allow the financial sector to identify new business opportunities.  A changing climate will generate further opportunities as new investment is needed; new technology emerges and economies transition to net zero emissions.

Contact us

It is important for businesses to consider and monitor regulators’ comments and requirements on climate change related risks. As a firm Clyde & Co remains committed to mapping and understanding climate change risk alongside a growing network of cross-sector experts and collaborators, to help our clients navigate the rapidly evolving risk landscape they face. If you would like to discuss the Draft Guide, the issues raised and how this may impact your business please contact Jacinta Studdert and Dean Carrigan.

Read more

We have published an article on ASIC’s Report 593 on Climate Risk Disclosure By Australia’s Listed Companies, which can be accessed here.

Clyde & Co regularly publishes articles on identifying and managing the risks resulting from climate change, which can be found at the Resilience Hub and the Climate Change Risk Practice page.

[1] The Fund was forced to recognize the financial effects of climate change when making investment decisions McVeigh v Retail Employees Superannuation Pty Ltd NSD1333/2018 – settled.


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