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APRA amplifies climate risk monitoring

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The prudential regulator has ramped up its efforts around setting how financial institutions prepare for climate change, indicating it will be stress testing how vulnerable the major banks are as well as updating ESG standards for super funds.

APRA has said it is seeking to undertake a climate change financial risk vulnerability assessment, beginning with the country’s largest authorised deposit-taking institutions (ADIs).

Australia’s largest banks will see their vulnerability assessment designed in the year to come and executed by next year, with other industries to follow. The timing also aligns with international peer regulator guidance on scenario analysis for the banking sector.

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“Beginning with the ADI industry will provide helpful insights on the impact of a changing climate on the broader economy, which will be analysed in conjunction with the Reserve Bank of Australia,” the regulator said in a letter to industry.

“The vulnerability assessment will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy.”

APRA will be working with ASIC and the RBA via the Council of Financial Regulators across the scenario analysis, disclosure recommendations and to assess the macro-economic impacts of climate change.

The prudential regulator indicated it will also seek input from the Commonwealth Scientific and Industrial Research Organisation and the Bureau of Meteorology.

In the past, APRA has not been prescriptive as to how entities should understand and manage the financial risks of a changing climate.

But its 2018 climate change survey highlighted that while major institutions understand climate risk and have embedded it into risk management frameworks, there is a gap on information for business’ decision-making. The regulator will be conducting deeper supervisory assessments of each entity that participated in the survey, due to be completed mid-year.

“This work also highlighted the need to address the climate data deficit, to quantify the likely impact of the physical, transitional and liability risks of climate change and accurately assess and appropriately price these risks,” APRA said.

“This needs to ultimately be tackled through scenario analysis, stress testing and disclosure of market useful information.

“Effective action now on these fronts will promote strong understanding and management of the potential financial impacts of a changing climate on current and future business prospects, allowing well-managed entities to minimise costs and optimise benefits.”

Industry guidance to be released

The government body intends to develop and consult on a climate change financial risk prudential practice guide (PPG).

The guidance supposedly will be designed to assist entities in complying with their existing prudential agreements, rather than create new obligations.

The PPG will cover areas relevant to the prudential management of climate change financial risks, aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), including aspects of governance, strategy, risk management, metrics and disclosure.

APRA noted many industry participants have indicated they want more information from the regulator on better practice in relation to climate risk, as well as greater clarity on regulatory expectations.

The regulator said the PPG will be informed by other regulators, both local and international, as well as feedback from industry.

It plans to consult on a draft guidance mid-year, before publishing a final PPG before the end of the year.

Super investment governance also facing change

The superannuation Prudential Practice Guide SPG 530 on Investment Governance (SG 530) is also set to be updated. The standards aims to help registrable super entity licensees in complying with requirements for including ESG considerations in forming and implementing investment strategies.

APRA will consult on specific changes in SG 530 around mid-year, in conjunction with other changes to the superannuation prudential framework.

APRA expects its actions will clarify better practice, and coordinate focus from both industry and regulators to ensure that climate risk is managed. But it has urged entities to be proactive in taking steps to assess and mitigate climate risks and to “not delay action” until receiving further guidance.

 

APRA amplifies climate risk monitoring
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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 worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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