APRA instructs financial sector to manage climate risks

In publishing its first climate risk survey, the Australian Prudential Regulation Authority (APRA) has called on entities to move from gaining awareness of the financial risks to taking action to mitigate against them. 

APRA surveyed 38 large banks, insurers and superannuation trustees last year to assess their views and practices related to climate-related financial risks. The survey found a substantial majority of regulated entities were taking steps to increase their understanding of the threat, including all of the banks, general insurers and superannuation trustees surveyed.

Moreover, the regulator found that a third of respondents believed climate change was a material financial risk to their businesses now and a further half thought it would be in future. It was also revealed that a majority of banks considered climate-related financial risks as part of their risk management frameworks.

Respondents also described the strategic opportunities they had identified from the transition to a low carbon economy, including developing innovative products and services, and meeting the growing demand for green investment opportunities.

APRA executive board member Geoff Summerhayes said APRA had a responsibility to ensure financial institutions were alert to issues that could impact their ability to fulfil promises to customers.

"The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers. Companies that fail to respond to these forces risk being left behind," Mr Summerhayes said.

"Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over coming years."

He concluded that APRA expects climate risks will be assessed within existing prudential risk management standards CPS 220 and SPS 220, and that supervisors will factor this into their ongoing supervisory activities.