The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees. The guide covers sound practices in areas such as governance, risk management, scenario analysis, and disclosure of climate-related financial risks. The guidance is principles-based, is aligned with recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and has been developed in consultation with various domestic and international peer regulators. APRA also published its response to the feedback received to the consultation on the draft guidance.
To its April 2021 consultation on CPG 229, APRA received nearly 50 submissions, with stakeholders broadly welcoming the draft guidance but some requesting further guidance and clarifications. Consequently, APRA amended CPG 229 with respect to capital adequacy, the use of climate-related targets, and disclosing key design features of scenario analysis. Despite this additional clarity, The principles-based approach in the guidance aims to ensure flexibility, applicability to a wide range of institutions, adaptability to the evolving external environment, and complementarity to the existing risk management and governance requirements. With respect to the scenario analysis and stress testing, APRA guidance stipulates that, in fulfilling their obligations under CPS 220, it would be prudent for institutions to develop capabilities in climate risk scenario analysis and stress testing, or to have access to external scenario analysis and stress testing capabilities. This analysis would inform their risk identification over both the shorter- and longer-term. Scenario analysis and stress testing for climate risks is a developing area and APRA expects approaches to evolve and mature over time; however, the expectation of future improvements in approach is not a justification for delaying its use. With respect to disclosures, APRA anticipates the demand for reliable and timely climate risk disclosure will increase over time, and for institutions with international activities there is a need to be prepared to comply with mandatory climate risk disclosures in other jurisdictions. APRA considers it better practice for any disclosures to be produced in line with the framework established by the TCFD.
APRA encourages regulated entities to begin using the finalized guidance immediately to enhance their management of climate change financial risks in a manner that is appropriate to their business and the particular circumstances. Next year, APRA intends to undertake a survey to help gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the TCFD. In addition, APRA continues to advance its climate-related program of activities, including the climate vulnerability assessment that is underway with Australia’s five largest banks. This Prudential Practice Guide is designed to be read together with prudential standards on risk management (CPS 220 and SPS 220) as well as prudential standards on governance (CPS 510 and SPS 510), but does not address all prudential requirements in relation to risk management and 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. Not all of the practices outlined in this Prudential Practice Guide are relevant for every institution, and some aspects may vary depending upon the size, business mix, and complexity of the institution.
Keywords: Asia Pacific, Australia, Banking, Insurance, Climate Change Risk, ESG, Disclosures, Scenario Analysis, CPG 229, TCFD, Stress Testing, Reporting, APRA
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