Mariam’s article comes as Treasurer Jim Chalmers confirmed the government would mandate climate disclosures and has released a consultation paper inviting views on which companies should be included in phased implementation.
“In a recent study released by the financial services regulator, five of the largest Australian banks namely ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank, and Westpac predicted that they would have to change their risk appetites and lending practises in response to increasing climate-related losses,” says Mariam.
“The decisions were made on the back of a Climate Vulnerability Assessment (CVR) conducted across 2021-2022 by The Australian Prudential Regulation Authority (APRA), on behalf of the Council of Financial Regulators.
“The main goals in performing the CVA were to determine the type and scope of financial risks that significant Australian banks would encounter up until 2050 as a result of climate change, i.e., examine the nature and extent of climate risks to financial institutions primarily through the lens of credit risk.
“Its main objectives were to (1) Measure the potential financial risks that physical and transitional climate risks could pose to banks, the financial system, and the economy; (2) Understand how banks might modify their business models and implement management measures in response to the various scenarios; and (3) Enhance banks' capacity for managing climate risk.
“The analysis was conducted using two scenarios developed by the Network for Greening the Financial System (NGFS) which represents a coalition of central banks and supervisors focused on the development of environment and climate risk management in the financial sector among other key issues.
“The NGFS scenarios were created to offer a standard starting point for analysing climate risks to the financial system and economy, however, not as projections; rather, they seek to explore the bookends of potential futures for financial risk assessment that are neither the most likely nor the most desired.
“The two scenarios which the CVA focused on are the Delayed Transition Scenario with delayed policy action on climate change, followed by a rapid reduction in global emissions after 2030, and a Current Policies Scenario representing a future with continued increase in global emissions beyond 2050.
“While the climate risks under the scenarios studied were unlikely to lead to severely impacting the banking system, the study showed that banks could experience increasing losses from their lending portfolios from physical and transition risks in the medium- to long-term.
“Within business lending, both scenarios were found to result in a substantial increase in losses arising from transition risks, with greater losses under the Delayed Transition Scenario.
“Mortgage lending results varied widely by bank, ranging from no climate-related losses to lending loss rates up to approximately three times higher than historic averages by 2050.
“Overall, Climate-related risks were found to be concentrated in specific regions or Industries, including significantly higher mortgage losses in regions, more exposed to severe and prolonged physical risk, and some sectors more exposed to transition risks, such as mining, manufacturing and transport. In response, the banks indicated that they w”ould adjust their risk appetites in these sectors.
“Potential actions include cutting back on high loan-to-valuation, mortgage lending, and reducing exposure to certain sectors like mining, manufacturing, and transport.
“In essence, managing climate-related risks and supporting the transition to a low-carbon world are amongst our most significant global challenges and remains crucial to the long-term survival and sustainability.
“Central Banks and Financial Regulators (otherwise known as CBFRs) consider the identification, measurement and disclosure of these risks to be a priority. Developing adequate capacity and capability on the subject area becomes essential for banks across the world if they are to take on the responsibility of managing the losses from their lending portfolios from physical and transition risks.”
Recognising the strategic importance of the topic of climate risk, the Chartered Body Alliance developed its first joint qualification in 2021, the Certificate in Climate Risk, which is being rolled out in Australia by FINSIA.
The aim of the qualification is to develop the learner’s professional knowledge, understanding and skills relating to climate change, climate risk, and sustainable finance, with a view to supporting customers, clients, colleagues, and communities with the transition to a sustainable, low-carbon world.