Climate Change and Risk Management

Warnings on climate are unequivocal and whilst we can argue over the causes it is clear that green house emissions are increasing, driven largely by industrialisation & population growth. This in turn is increasing the likelihood of severe, intensive & irreversible impacts.

2ISPC we have been tracking the regulators increasing interest in the potential financial impact of climate change.

The Bank for International Settlements via the Financial Stability Board believes that there is “an obligation on entities to disclose material risks in their financial filings—including material climate-related risks.” They believe “climate- related risks are material risks”; and

Geoff Summer Hayes, Executive Board Member APRA, made the following comments last year "APRA believed many climate-related financial risks were no longer future concerns. They were “foreseeable, material and actionable now”.

We at
2ISPC have been developing an approach to the risk management of climate change in three key areas of business :
  • Physical risk: the risk arising, both directly and indirectly, from weather related events; e.g. the bank lending against a residential property in a flood-prone area or to a business in a cyclone-prone region.

  • Transition risk: the risk arising from the transition to a low carbon emission economy; e.g. the bank lending to a business whose revenues and/or profitability may come under pressure; and

  • Liability risk: the risk arising from the parties who suffer loss and damage seeking recourse from those whom they believe bear some responsibility; e.g. the launch of a case against the Super fund REST in July 2018, which is being sued for not having a plan for climate change.

A key challenge for both the established and new market participants is how to articulate, manage and look to mitigate these types of risk within a risk profile that is acceptable to the regulator.

One solution does not fit all and to ensure that institutions are preparing themselves for these types of future concerns Boards and executive will be required to invest in understanding, disclosing and managing these risks.

To discuss this topic in more detail and how it applies to your organisation
Contact us today.

David Ingham B.Ec MBA
Phone: 0418 494 010