Executive member of the Australian Prudential Regulatory Authority Geoff Summerhayes says he expects the renewable transition in the energy sector to have largely played out by 2030, and stresses that climate change is a unique type of financial risk facing the global economy.
Summerhayes, who serves on the executive of APRA, that sits alongside ASIC and the RBA as one of Australia’s core financial regulators, has strongly advocated for the treatment of climate change as a financial risk.
In comments to the Investor Group on Climate Change Summit in Sydney, Summerhayes expressed optimism about the pace of change that will occur in the energy sector, predicting that the transition towards lower emissions sources of energy will have largely played out by 2030, due to accelerating technological innovation.
“There is a lot of focus on energy, of course, that is one of the big systems that has to transition, and it is my view that the energy system transition will play out a lot quicker than everyone thinks. I think that will have played out by 2030,” Summerhayes said.
“I love the Bill Gates quote, that ‘we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten’, so my view on energy is that whenever you get convergence of technologies together, like batteries, EVs, photovoltaics, you get a cost curve going down and the economics will drive it.”
“Adoption on all these things gets steeper and steeper,” Summerhayes added. “Look at the smartphone, from 2007 there was saturation in under ten years; it happened because of the convergence of technology. It happened because of the s-curve of adoption, the cost curve just plummeted, and that we will see that in the energy sector, is my view.”
Members of Australia’s institutional investment community, which includes wealth fund managers and superannuation firms, have gathered in Sydney to assess and discuss the management of climate change as a financial risk and to build momentum for sustainable finance.
Summerhayes says that he believes climate change is a different type of financial risk, as the world currently has no way to reverse the expected impacts.
“Climate change is different to other risks. Unlike a capital risk, or a cyber risk, where you can always re-capitalise an organisation or with a cyber risk you may be able to recover the data, nobody has worked out how to cool the planet,” Summerhayes said.
“So climate is a is a ratcheting risk, where it is ratcheting up. Two degrees was chosen as a target because beyond 2 degrees we’ll trigger feedback loops that nobody is quite sure how they will play out.”
For investors, climate change poses a risk both to the physical assets they are invested in, but also a transitional risk as sectors like the energy sector transition to new energy sources and new technologies. Investors face the risk of being left with stranded assets unless they are proactive in the energy transition.
Financial regulators, including APRA, have been ramping up calls for investors, and company directors, to incorporate assessments of the risks posed by climate change into their business planning and have raised the prospect that directors may face legal liabilities for a failure to adequately address climate-related risks and for failing to limit their contributions to global warming.
Global investor groups have joined together to call on governments to implement meaningful and stable policies to tackle climate change, including commitments to meet the goals of the Paris Agreement.
Many investment managers have begun incorporating the Paris Agreement goals, including limiting global warming to well below 2 degrees, as part of their business planning, which has required inventors to reassess the appropriateness of investments in coal.