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APRA targets climate risks in financial sector

APRA targets climate risks in financial sector

— 1 minute read

APRA has pledged to up its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change to their businesses, following the release of its first survey on the matter.

The regulator has called on financial entities to take action to mitigate against climate risks, saying it found that a substantial majority of firms are merely taking steps to increase their understanding of the threat.

The survey undertaken last year involved 38 large banks, insurers and superannuation trustees, aiming to assess their views and practices related to climate-related financial risk.

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The research said a third of respondents believed climate change is currently a material financial risk to their businesses and a further half thought it would be in the future.

The majority of banks were said to consider climate-related financial risks as part of their risk management frameworks.

Reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.

Respondents were also said to describe the strategic opportunities they had identified from the transition to a low carbon economy, including developing innovative products and services, and meeting the growing demand for green investment opportunities.

APRA’s effort is reflective of a greater trend in the finance sector, with investors calling for environmental action internationally and also pressuring financial firms in Australia.

Last week, the Reserve Bank said climate change presents significant risks for Australia’s economy.  

However, three of the big four banks had been found to increase their exposure to fossil fuel energy over the past year.

“APRA’s views on the economic risks of climate change, recently echoed by the Reserve Bank of Australia, are consistent with those of financial regulators internationally,” Geoff Summerhayes, executive board member at APRA, said.

“These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing.”

Mr Summerhayes added APRA had a responsibility to ensure financial institutions were alert to issues that could impact their ability to fulfil promises to customers.

The watchdog expects firms will assess climate risks within existing prudential risk management standards CPS 220 and SPS 220.

“The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers,” Mr Summerhayes said.

“Companies that fail to respond to these forces risk being left behind.

“Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over the coming years.”

 

APRA targets climate risks in financial sector
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah spent her career working in business-to-business media, including print and online, as well as cutting her teeth on current affairs programs for community radio. 

Sarah has a dual bachelor's degree in science and journalism from the University of Queensland.

You can contact her on [email protected].

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