APRA releases climate risk assessment results

Almost 40% of banks, insurers and superannuation funds say climate-related events could have a "material or moderate impact on their direct operations," according to the Australian Prudential Regulation Authority (APRA).

APRA has published the findings of a voluntary climate risk self-assessment survey conducted across the entities APRA regulates. 64 medium to large institutions responded to the survey, which was designed to provide insights into how institutions are aligning their practices with the expectations outlined 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.

Out of the 64 institutions that responded to the survey, four out of five boards oversee climate risk on a regular basis, while 63% have incorporated climate risk into their strategic planning process.

Further, 73% of responding entities said they had one or more climate-related targets in place, but 23% of institutions do not have any metrics to measure and monitor climate risks.

Over two-thirds of institutions (68%) said they have publicly disclosed their approach to measuring and managing climate risks, with 90% of those institutions aligning their disclosure to the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

"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," said APRA deputy chair Helen Rowell. "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."

APRA reported that one area for improvement is metrics and targets.

"While many institutions indicated that they measure and monitor climate risks using quantitative or qualitative approaches and set targets, use of more advanced quantitative risk metrics such as scope 3 and financed emissions, and forward-looking exposure to physical and transition risk, was limited," APRA said.

"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," Rowell said.

The larger the institution, the more mature the management of climate risks, the survey found, with larger institutions consistently scoring themselves higher than smaller institutions in the surveyed group.

Smaller institutions have "relatively more concentrated exposures to certain markets, industry sectors or specific geographies that may be impacted by climate change," APRA noted, saying that it is equally important for smaller institutions to identify and manage their climate risks.

"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," Rowell said.

CPG 229 is designed to assist banks, insurers and superannuation funds in managing climate-related risks and opportunities as part of their existing risk management and governance frameworks. The guide outlines better practice for identifying, managing and disclosing financial risks of climate change in line with the TCFD.

The guide outlines best practice across five pillars - identifying and measuring risks to understand potential impacts on business model, monitoring risks through regulator updated metrics, considering scenario analysis to inform understanding of long-term risks and opportunities, evidencing plans to manage risks through mitigation plans, including through engaging customers and counterparties, and reporting relevant information to board and senior management, and considering external market disclosures.

Read more: climate riskAustralian Prudential Regulation AuthorityHelen Rowell