APRA to increase scrutiny of climate risks

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The Australian Prudential Regulation Authority (APRA) has announced it will increase its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change to their businesses, following a recent survey.

Releasing the results of its first climate risk survey of regulated entities, APRA called on entities to move from gaining awareness of the financial risks to taking action to mitigate against them.

In its survey of 38 large banks, insurers and superannuation trustees APRA found:

  • Three types of climate-related risks were identified – physical, transition and liability risk
  • 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.
  • 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;
  • A majority of banks considered climate-related financial risks as part of their risk management frameworks; and
  • Reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.

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.

“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.

“APRA’s views on the economic risks of climate change, recently echoed by the Reserve Bank of Australia, are consistent with those of financial regulators internationally. These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing,” said Mr Summerhayes, who is also Chair of UN Environment’s Sustainable Insurance Forum.

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