More than 60 entities regulated by the Australian Prudential Regulation Authority (APRA) are generally aligning well to the regulator’s guidance on managing the financial risks and opportunities that may arise from a changing climate, especially in the areas of governance and disclosure.
This finding is based on responses from 64 medium to large institutions to a climate risk self-assessment survey conducted by APRA across the insurance, banking, and superannuation industries.
The voluntary survey, carried out in March this year, was designed to provide insights into how APRA-regulated entities are aligning their practices with the expectations set out in Prudential Practice Guide CPG 229 Climate Change Financial Risks. Released last November, CPG 229 provides APRA-regulated entities with guidance on managing the financial risks and opportunities that may arise from a changing climate.
Climate risk, however, remains an emerging discipline compared to other traditional risk areas, with only a small portion of survey respondents indicating that they have fully embedded climate risk across their risk management framework.
Other key observations based on the entities’ self-assessments include:
four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions (63%) have incorporated climate risk into their strategic planning process;
almost 40% of institutions said climate-related events could have a material or moderate impact on their direct operations;
nearly three-quarters of institutions (73%) said they had one or more climate-related targets in place, however 23% of institutions do not have any metrics to measure and monitor climate risks; and
over two-thirds of institutions (68%) said they have publicly disclosed their approach to measuring and managing climate risks, with 90% of those aligning their disclosure to the Taskforce for Climate-related Financial Disclosures1 (TCFD) framework.
More work to be done
APRA deputy chair Helen Rowell said the findings are encouraging. However, there is more work to do.
“Climate change and the global response to it are creating financial risks for banks, insurers and superannuation trustees, whether it be the physical damage from floods or bushfires, or asset price volatility as consumer and investor demands evolve.
“The guidance in CPG 229 is aimed at helping our regulated entities identify and manage these risks, as well as being alert to opportunities to strengthen their businesses.
“The survey findings indicate that most survey participants are taking this issue seriously. However, they also underline that this remains a relatively new and evolving area of risk management, especially with regards to setting metrics and targets.”
“With stakeholder expectations on climate risk only going to rise further in coming years, we urge all regulated entities – not only those involved in the survey – to consider the findings and reflect on their preparedness,” Mrs Rowell said.