APRA published a letter that outlines its plans to undertake a climate change vulnerability assessment and develop a prudential practice guide focused on climate-related financial risks. The letter, which is addressed to all regulated institutions, also outlines intention of APRA to update the superannuation Prudential Practice Guide SPG 530 on investment governance, which includes paragraphs related to environmental, social and governance (ESG) investments. Furthermore, as part of the continued focus on financial risks associated with climate change, the deeper supervisory assessments of each entity that participated in the 2018 climate change survey are due to be completed in mid-2020.
APRA intends to develop and consult on a climate change financial risk prudential practice guide. This guidance will assist entities in complying with their existing prudential requirements, including those found in Prudential Standard CPS 220 on risk management. It will cover areas relevant to the prudent management of climate change financial risks, aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), including aspects of governance, strategy, risk management, metrics, and disclosure. The guidance will be informed by the APRA engagement with other domestic and international regulators and the ongoing engagement with industry participants. APRA will consult on the draft guide in mid-2020 and, subject to feedback, will seek to publish final guidance before the end of the year.
In collaboration with the Central Banks and Supervisors Network for Greening the Financial System (NGFS), APRA will also seek to undertake a climate change financial risk vulnerability assessment. The assessment, which will begin with the largest authorized deposit-taking institutions in Australia, is expected to provide helpful insights on the impact of a changing climate on the broader economy. APRA and the Reserve Bank of Australia (RBA) will both analyze the results of this assessment. The vulnerability assessment will be designed in 2020 and executed in 2021, with other industries to follow. This timing also aligns with the expected release of international peer regulator guidance on scenario analysis for the banking sector. The vulnerability assessment will involve entities estimating the potential physical impact of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy. APRA will coordinate this work with the Australian Securities and Investment Commission (ASIC) and the RBA, via the Council of Financial Regulators, to ensure consistency in the application of scenario analysis and disclosure recommendations and to analyze the macro-economic impact of climate change.
Furthermore, in response to the industry views outlined in the post-implementation review of the superannuation prudential framework, APRA intends to update the Prudential Practice Guide SPG 530 on investment governance. SPG 530 aims to assist registrable superannuation entity licensees in complying with requirements in relation to the formulation and implementation of an investment strategy, including in relation to environmental, social, and governance (ESG) considerations. APRA plans to consult on specific changes to the prudential standard and guide (SPS 530 and SPG 530) on investment governance sometime in the mid-2020, in conjunction with other changes to the superannuation prudential framework. Although this guidance will provide insights into better practice, a coordinated focus from both industry and regulators is required to ensure that the financial risks of a changing climate are managed effectively.
Keywords: Asia Pacific, Australia, Banking, Insurance, Securities, Pensions, Superannuation, SPG 530, ESG, SPS 530, Climate Change Risk, Scenario Analysis, Disclosures, APRA
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