APRA’s climate change financial vulnerability assessments for the banks will boost the quality of disclosures and risk management, according to Moody’s Investors Services, dubbing it a win for investors.
APRA recently indicated it is developing a climate risk prudential practice guide to assist financial services entities’ compliance with prudential requirements.
Further, it is carrying out assessments on regulated companies – with the major banks being the first to be tested for their management of climate risk.
Francesco Mirenzi, senior credit officer and Patrick Winsbury, associate managing director at Moody’s Investors Service have deemed the vulnerability assessment as credit-positive, saying it will improve Aussie banks’ expertise and understanding of climate-related financial risks.
The practice guide is likely to improve the quality and consistency of climate-related financial disclosures, they have said, calling it a “positive development for investors”.
APRA has signalled the guide will cover management of climate risk, including governance, strategy, risk management, metrics and disclosure.
The decision to develop it, the regulator said, is aligned with recommendations from the Task Force on Climate-related Financial Disclosures.
“The vulnerability assessment will require banks to estimate the potential impact of a changing climate, including extreme weather events, on their balance sheets,” Moody’s said.
“It will also require the banks to estimate the impact of the global transition to a low-carbon economy. The results are expected to provide 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 vulnerability assessment will be designed in 2020 and completed by banks in 2021, aligning with the expected release of international peer regulator guidance on scenario analysis for the banking sector.
Moody’s noted the APRA decision has followed a recent key message delivered at the meeting of the Bank for International Settlements’ Financial Stability Institute – that companies and financial authorities need to improve their ability to assess financial risks posed by climate change.
The meeting, which included representatives of central banks, financial supervisory authorities, banks, insurers, academia and climate change risk modelers, agreed that “climate change poses a credible threat to financial stability”, the analysis stated.
The institute concluded that financial entities and regulators need to consider how severely future climate events could shock financial institutions’ balance sheets.
“Consequently, we expect that climate-related financial risks will become a more prominent part of bank stress testing over time,” Moody’s analysts said.
“In November 2019, the French regulator announced it would stress test financial institutions against two or three climate change scenarios. The Dutch National Bank introduced an energy transition risk stress test for the Netherlands in 2018, while in April 2019 the International Monetary Fund introduced stress testing for the transition to a low-carbon economy. The Bank of England plans a similar exercise for banks, possibly by 2022.”
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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