Physical climate risk gap needs investor scrutiny: IGCC

The gap between the physical climate risks projected for the Australian economy and what companies are reporting about their own exposure deserves a closer scrutiny from investors, the Investor Group on Climate Change (IGCC) said.

Last year's National Climate Risk Assessment (NCRA) rated the climate risk to Australia's economy as moderate now, but very high by 2050, warning of potential financial shocks and "strong market corrections" without enough investment in adaptation.

However, the NCRA added businesses lacked the data and guidance to assess physical climate risk, which it described as difficult to quantify and often beyond the planning horizons of financial institutions, pointing to mandatory disclosure as one way to fill that gap.

IGCC director of communications and climate resilience Fergus Pitt said the first year of mandatory climate disclosures is showing it's a lot easier to talk qualitatively than quantitatively when it comes to physical risks from climate change.

ASIC's latest review of mandatory sustainability reports found 37.5% of the 40 it examined gave no figure or range for the financial effects of climate-related risks and opportunities, with more than half citing measurement uncertainty to some extent. The first wave of mandatory reporting covers Australia's largest corporates.

Pitt pointed to the Commonwealth Bank's latest report, which identified serious climate risks in its commercial loan book, but were unable to quantify it.

"They did a decent job of quantifying the risks in their residential loans, but for their commercial loans, what they said was, 'Look, we can't put a number out there and really stand behind it,'" Pitt said.

"They said the data and methodologies just [aren't] mature enough. They said they're working on it, and this is Australia's biggest bank. So clearly, it's not easy to quantify the risks across the board."

Pitt noted it is important to address the question of mismatch between the whole of economy view and what companies are seeing individually.

"In years gone past, it was very, very rare - vanishingly rare - [for] companies to do anything other than say, 'We don't think that we've got material climate risks in our business,'" Pitt says.

"When you take a look at the information that's in the National Climate Risk Assessment, you've got to at least raise the question. If you've got a lot of companies saying, 'Hey, there are no material risks,' and the NCRA saying there's a lot of risk in the economy...there's a question mark there. It's a legitimate question."

The NCRA found while large companies in the energy, insurance and banking sectors have the resources to conduct climate risk assessments on their own portfolios and to invest in resilience, they remain vulnerable to cascading risks, where climate damage in one part of the economy flows on to others.

Pitt said it was possible all sides were accurate in answering the questions they were being asked, adding there was still a lot of work to come as companies gathered more information and became more sophisticated in understanding their entire value chains.

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