Banks, insurers move on climate despite policy failure

Banks, insurers and institutional investors will push ahead on tackling the financial risks from climate change despite the absence of a government framework.

While the Government’s failure on the National Energy Guarantee scheme typifies a lack of adequate policy framework to address the urgency of climate change, the sector the sector remains optimistic that challenges from climate change can be tackled.  

The sector has already drawn up a roadmap for a sustainable future. This roadmap is a culmination of work already done by the UNEP FI which has been working with global task forces to develop a national action plan that will spur the finance sector to do much of the work in delivering a more resilient and sustainable economy.

While a whitepaper will soon be launched to outline specific action plans, Deloitte principal and climate change expert Sharanjit Paddam said it’s a really good outcome and in some ways replicates the work already done by the European Commission.

“It’s an interesting approach as the roadmap is not dependent on government action which seems to be the right thing given that it seems difficult to get political traction on the issue,” he said.

The sector is under no illusion there is much to do. According to industry data, the total economic cost of natural disasters in Australia over the 10 years to 2016 averaged $18.2 billion per year – equivalent to 1.2 per cent of GDP. By 2038, the total economic cost of natural disasters in Australia is set to double.

IAG group executive of people, performance and reputation, Jacki Johnson, describes herself as an optimist.

“If we galvanise now, it’s not too late. It will take a concerted effort. We need an orderly transition to a low-carbon world and the financial services sector has a role to play in both signaling as well as managing the risks,” Johnson said.

As a founding member of the Australian Business Roundtable for Disaster Resilience and Safer Communities, IAG is galvanising itself by working with five other businesses including Westpac, Munich RE, Optus, Investa and the Australian Red Cross to coordinate and act on mitigating climate risks.

While the group will do this by working with all levels of data, it also aims to make better use of data - applying information to assess weather patterns a well as rethink urban planning, that is assessing what areas – including the coast – that are prone to adverse weather events such as flooding and rising sea levels.

For Johnson, financial institutions like banks and insurers need to lead on climate change rather “than leave it to a system to fix things. We need collaboration to solve the issues together”.

Banking on action

Deloitte’s Paddam notes that banks do understand climate risks, as evidenced by the sector scaling back on fossil fuel projects.

“In Australia there is very little appetite for thermal coal and banks are reviewing their portfolio to understand the transition risks from lending to existing industries [such as coal] to newer [lower carbon-intensive] industries,” Paddam said.

While there have been reports on the banking sector lagging on climate change disclosure, Paddam believes that the Financial Stability Board’s Task Force on Climate-related Financial Disclosures will also better position the banks to understand and disclose their risks and how to manage them.

The Commonwealth Bank made their first TCFD disclosure as at 30 June – Deloitte had assisted them with the underlying physical risk analysis. Notably, CBA disclosed that they have reduced their lending to the coal power sector by more than 50 per cent over the last year.

The Investor Group on Climate Change (IGCC) group’s CEO Emma Herd notes that good progress has been made in responding to climate change as a financial risk, highlighting “pockets of excellence” such as the launch of green bonds, the development of responsible investment products and better climate change disclosure laws.

The IGCC – backed by institutional investors with $2 trillion in funds under management - is part of the Climate Action 100 plus push which has so far signed up 289 investors with nearly $30 trillion in assets under management to drive the clean energy transition and help achieve the goals of the Paris Agreement. IGCC is also a signatory to the Roadmap.

“The finance industry is very keen to get on with this and not waiting on government. We must now collaborate with industry. Given the challenging political environment in Australia, this will be important, but government will have to be part of the conversation,” Herd said.

Climate change academic, Christopher Wright, however, remains sceptical over the industry’s ability to drive change through initiatives such as a roadmap.

The Professor of Organisational Studies at the University of Sydney Business School and the Sydney Environment Institute acknowledges that there is greater commonalty in public announcements made by leaders in financial services – including Governor of the Bank of England Mark Carney.

“However, the political situation both domestically and globally is pretty grim. With Trump in America and the rise of right wing populist governments, climate change challenges have not resonated politically. This conflicts with the ambition of the financial sector in trying to move on this challenge,” Wright said.

For the full report, see the September edition of AB+F

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