APRA welcomes new Climate Index

  • By Christine St Anne

The Actuaries Institute has launched a Climate Index to help policymakers and businesses measure the impact of extreme weather, an initiative welcomed by the Australian Prudential Regulation Authority.

Last year, APRA last year warned that the risks of climate change were “foreseeable, material and actionable now”.

“APRA has a longstanding working relationship with the Actuaries Institute, collaborating on financial risk metrics and standards,” the prudential regulator’s executive board member Geoff Summerhayes said.

“We believe this initiative is a positive step towards helping regulated entities to understand and manage the potential impact of climate risk on their businesses,” he said.

According to Actuaries Institute chief executive Elayne Grace, there is increasing demand from investors and regulators for the banking and insurance sectors to report on how they manage their exposure to climate change risks: whether that’s through insurance products, commercial or residential loans or assets and investments.

She said the Index delivers the complex information on weather extremes and how they are shifting under climate change in different regions in an “easily digestible way”.

“Financial services are already doing a lot of work to better understand how exposed their loan and insurance books are. This index gives them a meaningful factual comparison basis, by natural peril type, to compare against for different regions,” she said.

“We believe it will be increasingly used within the finance sector, but also, we hope it helps Australians generally understand where change is happening.”

The Australian Actuaries Climate Index (AACI) has been developed in consultation with the Bureau of Meteorology, the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and insurance and natural hazard scientists and regulators.

“The components of the index were chosen due to their link to risk, an area of expertise for actuaries, and because extremes have the greatest potential impact on people and, often, the largest cost to the economy,” the Actuaries Institute said in a statement.

Property damage, health and other risk data is expected to soon be incorporated into the index.

The first AACI shows frequency of extreme conditions in Autumn 2018 was higher than historical extremes for Autumns in baseline period from 1981-2010.

A measurable framework to assess the risks of climate change on the sector has been consistently called for by the industry.

The sector has already moved to establish a roadmap for a sustainable future, which includes improved company disclosure.

Emma Herd, CEO of the Investor Group on Climate Change – a group of institutional investors with around $2 trillion in funds under management – said the effects of climate change are here and now and getting worse.

“Australian investors are looking for the tools they need to better assess and mitigate physical risks for their investments. The  Index is a welcome new tool for managing climate risk,” Herd said.

Tim Andrews, a Principal at Finity Consulting collated the index, using data from the Bureau of Meteorology’s network of weather stations and tide gauge facilities. The data was collected nationally and grouped into 12 climatically similar regions.