APRA finalises prudential guidance on managing financial risks of climate change

The Australian Prudential Regulation Authority (APRA) has released its final prudential practice guide on climate change financial risks, following consultation on the draft Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) released in April this year.

The guide is designed to assist banks, insurers and superannuation trustees to manage the financial risks of climate change. The guide imposes no new regulatory requirements or obligations, but will instead assist APRA-regulated entities to manage climate-related risks and opportunities within their existing risk management and governance practices.

The guide covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure of climate-related financial risks. It is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.

Feedback to the consultation, which received nearly 50 submissions from a diverse range of stakeholders, broadly welcomed the draft guidance. Some stakeholders, however, sought a greater level of prescription in response to concerns that they may lack adequate capabilities or resources to address the financial risks of climate change.

APRA Chair Wayne Byres said the transition to a lower-emissions economy created financial risks that businesses needed to be prepared for.

“Recent developments, including the Australian Government’s commitment to net zero emissions by 2050, underscore the trajectory the world is on in response to climate change.

“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws or adjustments in asset values, but they don’t always have a good understanding of how to respond. CPG 229 is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice.

“Recognising the diversity of APRA-regulated entities, however, the guide does not prescribe any particular way of doing things. Nor does it force companies to making any particular investment, lending or underwriting decision – those are matters for the entities themselves to decide. But we do want to make sure that those decisions are well-informed, and don’t undermine the interests of bank depositors, insurance policyholders or superannuation members,” Mr Byres said.

In response to feedback to the consultation, APRA has made minor amendments to CPG 229 related to capital adequacy, the use of climate-related targets, and disclosing key design features of scenario analysis. While additional clarity has been provided in some areas in response to requests for more prescription, APRA has endeavoured to maintain a principles-based approach to the guidance to ensure it remains flexible, applicable to a wide range of institutions, adaptable to the evolving external environment, and complimentary to APRA’s existing risk management and governance requirements.

APRA-regulated entities are encouraged to begin using the finalised guidance immediately to enhance their management of climate change financial risks in a manner that is appropriate to their business and its particular circumstances.

Next year, APRA intends undertaking a survey to help gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures. In addition, APRA continues to advance its climate-related program of activities, including the climate vulnerability assessment that is underway with Australia’s five largest banks.

Copies of the CPG 229 response paper are available on APRA’s website at: consultation on draft Prudential Practice Guide on Climate Change Financial Risks.

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