APRA Proposes Guidance on Managing Financial Risks of Climate Change
APRA launched a consultation on the Prudential Practice Guide for the management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees. The guidance covers views of APRA on sound practices in areas such as governance, risk management, scenario analysis, and disclosure. CPG 229 is aligned with the recommendations from the FSB Task Force on Climate-related Financial Disclosures (TCFD) and was developed in consultation with both domestic and international peer regulators. The comment period for this consultation will end on July 31, 2021 and the final guide is expected to be released before the end of 2021.
APRA has developed this practice guide in response to requests from industry for greater clarity of regulatory expectations and examples of better industry practices. The proposed guide aims to assist an APRA-regulated institution in complying with the CPS 220 and SPS 220 on Risk Management as well as CPS 510 and SPS 510 on Governance. Subject to meeting the requirements of the prudential standards, an APRA-regulated institution has the flexibility to configure its approach to climate risk management in a manner best suited to achieving its business objectives. APRA expects the implementation of the guidance proposed in CPG 229 to reflect an entity’s size, business mix, and complexity, noting that concentrations in a particular market, sector, or geographic location may expose an entity to more material climate risks. In CPG 229, APRA proposes practices in the following areas in the management of climate change financial risks:
- Identify and measure risks, including those in high exposure sectors, to understand potential impact on business model
- Monitor risks through regularly updated qualitative and quantitative metrics
- Evidence plans to manage risks through mitigation plans, including through engaging customers and counterparties
- Report relevant information to board and senior management and consider external market disclosures
- Consider scenario analysis to inform understanding of long-term risks and opportunities
Scenario analysis is an area where APRA sees a wide range of capabilities and practices. APRA is undertaking a climate vulnerability assessment involving largest banks in Australia; the assessment will involve climate scenario analysis in line with the expectations outlined in the draft guide. Overall, the draft guide does not create new requirements or obligations and is designed to assist entities to consider climate risks and opportunities in their existing risk management frameworks and to support well-informed decision-making.
Related Links
Comment Due Date: July 31, 2021
Keywords: Asia Pacific, Australia, Banking, Climate Change Risk, ESG, Governance, Disclosures, Scenario Analysis, CPG 229, Climate Vulnerability Assessments, TCFD, Stress Testing, Reporting, APRA
Featured Experts
Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.
Amnon Levy
Financial researcher; authority in credit portfolio management and AI/ML, risk-based pricing, climate and credit, CECL/IFRS 9; credit and ALM
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Previous Article
EC Proposes Regulatory Framework for Artificial IntelligenceRelated Articles
EC Regulation Sets Out Standards for Reporting and Disclosure of MREL
EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).
APRA Decides to Standardize Submission Date for Quarterly Reporting
APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.
ECB Working Group Publishes Recommendations on EURIBOR Fallbacks
The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).
Bundesbank Publishes Supporting Documentation for Reporting by Banks
Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.
EBA Publishes Phase 1 of Reporting Framework 3.1
EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).
APRA to Finalize Capital Adequacy Standard Revisions by January 2022
Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA
ESMA Issues Guidelines on Outsourcing to Cloud Service Providers
ESMA published the final guidelines on outsourcing to cloud service providers.
EBA Publishes Data on Deposit Guarantee Schemes
EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.
OSFI Sets Out Plan for Future Guidance on Managing Technology Risk
OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.
MAS Updates Housing Loan Rules, Proposes Corporate Governance Guidance
MAS updated rules for new housing loans by banks and finance companies.
