April 7, 2020 | Published by |

Picture: Suspended umbrellas. Credit: Ulises Baga (Unsplash).

Engagement activities by the NESP Earth Systems and Climate Change Hub and ARC Centre of Excellence for Climate Extremes.
by Sonia Bluhm & Ian Macadam

In recent years, there has been growing interest in developing more sustainable finance systems, both globally and nationally, to support better social, environmental and economical outcomes. At the same time, climate change is posing evermore serious risks to the global economy and impacting many economic sectors. Investors are increasingly questioning whether companies are adequately considering and reporting their climate risks before making investment decisions.

In 2017, recommendations from the international finance industry’s Task Force on Climate-related Financial Disclosure (TFDC) cast a spotlight on this issue for Australia. In response to the TFDC’s recommendations, many organisations in the Australian financial services sector have begun to consider the impacts of climate change as part of their strategic planning, risk management processes and financial disclosures. Companies need to analyse the climate-related risks to which they are exposed if they are to disclose and address these risks. Credible analysis of these risks relies on credible science, which is where the National Environmental Science Programme Earth Systems and Climate Change Hub (ESCC Hub) and the ARC Centre of Excellence for Climate Extremes (CLEX) come in.

The ESCC Hub and CLEX have been engaging with the Australian financial services sector to better understand its climate change information needs. As part of  ESCC Hub case studies undertaken over 2018/19-2019/20, Hub researchers completed a number of stakeholder engagement activities and found that, in general, currently available climate information and data is useful to the sector in some, but not all, cases. While different parts of the sector needed different information, there were some common threads related to how the delivery of climate information to the sector could be enhanced:

  • Standardised scenarios based on scientifically robust projections of future climate for framing financial sensitivity analysis, risk and exposure.
  • Targeted guidance, training and background learning to facilitate applications.
  • More information about extremes, compound extremes and ‘worst case’ scenarios.
  • Easier access to relevant data and information (including enhanced visualisation tools and integration with financial management models).

CLEX has a continuing dialogue with its partners to discuss the potential in many of these areas. Recent conversations have covered future climate projections, extreme storms and compound extremes.

The ESCC Hub has also worked to raise awareness of what information is currently available and how it can be applied, through participation in a number of events, workshops and board meetings with companies, sector bodies and initiatives.

Other engagement activities have been based around hypothetical “war gaming” exercises involving both researchers and industry representatives. In August 2019, the ESCC Hub and CLEX teamed up with industry partners to run a climate change science and catastrophe modelling/risk assessment workshop involving representatives from across the finance industry, as well as federal and state government agencies. Informed by presentations by the Hub, CLEX and the industry, participants considered a hypothetical designed to investigate how the insurance sector would estimate risk and provide insurance cover for loss and damage to Queensland State Government assets from the impacts of extreme rainfall over the next 20 years. The workshop allowed participants to consider how extreme weather and climate change projections could be integrated into industry-thinking on risk assessment, risk transfer options and associated market offerings. The workshop successfully brought together financial services sector stakeholders and climate change science researchers to better understand each other’s modelling and data needs.

Recognising the role of young professionals and researchers as our next generation of leaders, the Hub has worked with various institutes within the finance sector to develop a series of Young Professional events based on hypotheticals. These draw together a range of participants from different backgrounds – including government, research, industry and the private sector – to consider complex and multi-faceted climate challenges. The aim is to assist young professionals across research and industry in building strong and lasting relationships, to consider challenges from different angles and to understand how their expertise and knowledge can play an important role in addressing Australia’s climate-related challenges.

All of this activity is moving towards a finance sector that is universally well-informed about climate risk by credible scientific information. The current participation of ESCC Hub and CLEX representatives in an industry-led initiative called the Climate Measurement Standards Initiative (CMSI) represents significant progress towards this goal. The CMSI is a collaboration between insurers, banks, scientists, regulators, reporting standard professionals and industry service providers. It aims to develop open-source technical, business and scientific standards for measurement of physical climate risk to buildings and infrastructure in Australia. The Hub and CLEX are participating in the initiative primarily through support for the CMSI Secretariat and its Science Committee, the latter of which aims to inform scientific principles and guidelines for analysis and reporting of these risks. This represents a significant milestone in linking climate change risk management by the finance sector to world-class Australian climate science.