The prudential regulator has warned businesses that they must work quickly to understand “the unprecedented nature of climate change” if they want to avoid havoc in the financial system.
APRA has urged businesses to recognise climate risks as different from those they’ve faced in the past, warning that a “strategic approach” is necessary for managing “the potential for irreversible changes in climate, leading to impacts that may not be easily mitigated or reversed”.
“Since the Australian Government became a party to the Paris Agreement, APRA has been raising awareness of climate-related risks to the financial sector. Given the unique and long-term nature of the risks, however, processes to measure, monitor and manage climate-related financial risks are still developing,” said APRA chair Wayne Byres.
APRA warned that company directors could be held liable if they do not “adequately consider” the impacts likely to be posed by climate change, while physical and transition climate risks – related to changes in policy or technology – must also be predicted and mitigated.
APRA developed the draft guide in response to requests from businesses for greater clarity on regulatory expectations but doesn’t create any new guidelines or standards for them to follow.
“The prudential practice guide doesn’t direct or prevent APRA-regulated entities making any particular business or investment decision. Rather, it is aimed at ensuring decisions are well-informed and appropriately consider both the risks and opportunities that the transition to a low carbon economy creates,” Mr Byres said.
The Responsible Investment Association Australasia (RIAA) welcomed the new guidance but warned that there “remains a gap” between investment strategy and consumer expectations.
“This marks a significant step forward, recognising that Australia’s future resilience and prosperity depends on being able to navigate climate change risk,” said RIAA executive manager for policy and standards Nicolette Boele.
“We would hope, as in New Zealand, this guidance becomes mandatory, so that all financial institutions are pricing and valuing companies within the portfolios they manage, as well as realigning portfolios to contribute to a lower carbon world.”