The Australian Prudential Regulation Authority (APRA) has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance, and superannuation industries.
The voluntary survey, issued in March 2022, was designed to provide insights into how APRA-regulated entities are aligning their practices with the expectations set out in prudential practice guide on climate change financial risks (CPG 229). 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. The responses to the survey, from 64 medium to large institutions, suggest APRA-regulated entities are generally aligning well to APRA’s guidance, especially in the areas of governance and disclosure. 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.
- Institutions consider that they have moderate vulnerability to both physical and transition risks under a high-risk scenario, and they consider these risks to be within an acceptable range for the institution’s current risk appetite.
- 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.
- 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 Disclosures (TCFD) framework.
While the responses overall indicated broad alignment with CPG 229 across the industries, there are areas for improvement at both industry and individual institution levels. The insights from the survey responses will be integrated into supervisory activities in accordance with APRA’s risk-based supervision model. APRA expects institutions to evolve their climate risk management practices in response to developments in climate-related science, data, and stakeholder expectations. A future survey of this kind will be considered as a tool to monitor how APRA-regulated institutions are evolving their approach over time. APRA will be seeking to develop additional tools to evaluate climate-related financial risks and increasing its scrutiny of institutions’ progress in addressing the impact of climate risk.
Keywords: Asia Pacific, Australia, Banking, Climate Change Risk, ESG, Insurance, CPG 229, Disclosures, TCFD, Climate Risk Survey, Governance, APRA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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