The prudential regulator’s head of insurance Geoff Summerhayes said climate change risks will soon be central to all financial decisions made by APRA-regulated entities.
“In the future there will not be sustainable finance and other finance, all finance will need to be sustainable. Ultimately there will only be one form of finance, and that will be green finance,” Summerhayes said at the ACSI conference on Wednesday.
During a panel discussion, he confirmed that APRA did not view climate change as a moral issue, but as distinctly financial in nature.
However, he said after two years of research into climate change, APRA has decided that Australia doesn’t need new prudential regulation because the current framework covers all financial risk.
Summerhayes did concede that the prudential regulator’s investment guidance could be updated to reflect ESG integration.
Currently, climate change risks are seen in the guidelines as non-financial matters rather than risks integral to prudent portfolio construction and management.
One of the biggest challenges for companies, globally, is the difficulty of building climate change impact models which the APRA official puts down to a “data deficit”.
“Because of the unprecedented nature of climate change risk, and the fact that it is accelerating, solving the data deficit as it relates to management of risk requires a multidisciplinary response,” Summerhayes told the conference.
This could take years. That being the case, he is calling for companies with material climate risks to report under the Task Force on Climate-related Financial Disclosures (TCFD).
ASIC commissioner John Price weighed into the discussion saying he saw the TCFD disclosure regime as becoming the de facto standard for disclosure in Australia.
Both regulators told conference-goers that there was a question mark over whether TCDF will remain voluntary.
“Some jurisdictions are changing their view on that,” Summerhayes noted.
“I think more data, more disclosure, better modelling and better capability is fundamental to the mitigation and management of the risk.”
In terms of guidance, conference delegates heard that a number of asset owners would like more clarity from APRA on the integration of ESG risks and opportunities in investment decisions.
Rosemary Kelly, a director at First State Super, has chided APRA for characterising ESG as an ethical choice rather than a risk across a portfolio.
“The regulator has too narrow a definition of investment governance guidance (SP530) and it needs to expand,” she argued.
Interestingly, on Wednesday, ACSI also called for reforms to Australia’s framework for investment stewardship to encourage ESG integration.
ACSI chief executive, Louise Davidson, also argued that superannuation funds need clarification on SP530 because the ESG guidance “conflates ESG and ethical investing”.
“We are seeking recognition of the importance of ESG issues in APRA guidance and a requirement that trustee boards have capacity and competence on ESG issues,” she said in a statement released on the day of the ACSI conference.
Last week, APRA called for submissions from asset owners on the subject of updating SP530.