Regulators and the financial sector risk repeating the same mistakes that led to the 2008 Global Financial Crisis when responding to climate change, according to a new report co-authored by former head of the Australian Coal Association Ian Dunlop.
Released today, a week after the latest IPCC report warned time to act to limit temperature rises is fast closing, Degrees of Risk: Can the banking system survive climate warming of 3°C draws lessons from the GFC and urges the financial sector to change its approach to climate risks to avoid making the same mistakes.
While the financial sector is starting to grapple with the risks posed by climate change, the Australian Prudential Regulation Authority’s recent draft guidance to major companies on managing the financial risks of climate change recommends they stress test their finances against scenarios of temperature increases up to 4°C, and is proposing to stress test the whole financial system against 3°C of warming. Climate scientists say this level of warming would cause major societal disruption.
“After 30 years of inaction and rising carbon emissions, business and finance are finally beginning to take climate change seriously,” Mr Dunlop said.
“However, testing the system for 4 degrees of warming is unrealistic, simply because banks won’t survive it. Scientists consider a rise of 4 degrees to be an existential threat to humanity, and even 3 degrees of warming is considered catastrophic.
“International regulators failed to foresee the 2008 GFC. A similar failure on climate risks is on the agenda.
“It is not good enough to know that the bus is going over the cliff, as the regulators’ climate stress tests are telling us. The point is to stop the bus from going over the cliff in the first place.
“Regulators and financial institutions need to move beyond scenario analysis and disclosure of climate risks, to work with scientists, policy-makers and business and financial leaders in defining the precautionary action that must now be taken to prevent catastrophic climate impacts becoming locked in.
“Rather than stress testing scenarios of up to 4 degrees of warming, regulators and financial institutions should be mitigating climate risks, including by redirecting finance away from the fossil fuel industry into the new, clean economy.
“If the financial sector is to survive and prosper into the future, such precautionary action must keep temperature increase to a minimum, as close to 1.5°C as possible, coupled with drawing down carbon from the atmosphere.”
Former UK Chief Scientific Advisor and Special Envoy on Climate Change, Sir David King, wrote in the report’s foreword: “Degrees of Risk clearly articulates the need for regulators to revise their approach: understanding and disclosing the risks is not enough, the need now is to act on them.
“It is the short term which matters most. What global leaders do in the next three-to-five years will determine the future of humanity.”
Degrees of Risk: Can the banking system survive climate warming of 3°C is being released today by Breakthrough – National Centre for Climate Restoration.
Read the report at http://breakthroughonline.org.au/dor.
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