APRA Deputy Chair Helen Rowell - Remarks to the Australian Sustainable Finance Summit
Good morning, and thank you for inviting me to speak at the inaugural Australian Sustainable Finance Summit.
Before today’s panel discussion gets underway, I’d like to set the scene by updating you on what’s been happening in the Australian regulatory space over the past 12 months, as well as what’s coming up in the year ahead. Although my APRA hat remains firmly in place, I also speak to you today as Chair of the Council of Financial Regulators (CFR) Climate Working Group, which includes representatives of ASIC, the Reserve Bank and Treasury.
There was a time when APRA opining about climate risk was itself risky, as we faced occasional criticism for not “staying in our lane”. While that view seldom came from the entities we regulate, five years on from our first public comments on climate risk, APRA’s view that climate risks are distinctly “financial” in nature – and that many of these risks are foreseeable, material and actionable now – is well-embedded across the financial sector.
Our recent climate self-assessment survey found four out of five boards oversee climate risk on a regular basis, and just under two-thirds have incorporated climate risk into their strategic planning process. Engagement by APRA and the RBA across the investment community over the past year, meanwhile, confirmed that climate risks have shifted from being a peripheral, boutique subject to being a central topic of focus. Investors and consumers want to see action, and will take their money and business elsewhere if they’re dissatisfied.
Despite this, we are a long way from mission accomplished in terms of adequately mitigating the risks to financial resilience and stability. One of our chief challenges is ensuring that all participants in the financial ecosystem – investors, entities, consumers and regulators – have access to high-quality, reliable and comparable information. While it’s barely possible to open a newspaper or attend a business conference without climate risk coming up, the response remains hampered by the lack of information on how these risks will play out over coming years and decades across different industries. And it is on this problem that Australia’s main financial regulators are most keenly focused.
Assessing the impact
Central to regulators’ efforts to better understand the impacts of climate-related risks on the financial sector has been the Climate Vulnerability Assessment (CVA) conducted by APRA on behalf of the CFR. Starting with the country’s five biggest banks, the CVA has sought to answer three key questions:
- What impact would there be on their financial resilience and systemic stability under different climate scenarios?
- How would these financial institutions act to mitigate those impacts? and
- How prepared are they to do so?
Having received the banks’ results in May this year, we have spent several months examining them, and APRA will release the aggregated results of this consolidated analysis next month. The results will provide insights on the potential financial risks to participating banks from both physical and transition climate risks. Significantly, they highlight that these impacts are uneven across regions and business sectors, and some segments of banks’ lending portfolios are exposed to relatively higher risk. In other words, the system overall might remain resilient, but significant pain is likely to be experienced in some specific areas. The CVA also highlights how banks may adjust their portfolios over a period of several decades in light of these risks, and the impact these management changes may have on the banks’ sensitivity to climate risk.
Climate scenario analysis and modelling is an emerging area and there is opportunity for banks and industry to further develop their approaches to understand more fully the climate risks they face. In the longer term, our intention has always been to expand the CVA to other industries and other climate-related challenges, which will both provide insight into the scale of the challenges and an opportunity for other entities to build their capability in this important area. Until then, we expect insurers, superannuation funds, and even non-financial services companies, to benefit from the insights in the CVA: both from a technical perspective of the design decisions that were taken, but also by considering the experience of the CVA participants and how their organisational approach to addressing climate risk has evolved.
Putting it out there
The decision to publish our analysis of the aggregate CVA results underscores why disclosure is so important when it comes to addressing climate risk: keep the CVA results to ourselves and only regulators benefit from the acquired knowledge; publish the results and all financial entities – or anyone else who’s interested – can learn from the insights. The CFR’s second priority therefore is to further strengthen the building blocks needed to facilitate “high-quality” and “comparable” climate-related disclosures. Pursuing enhanced transparency in this area is consistent with the Government’s commitment to introduce mandatory disclosure requirements aligned with international standards.
As the regulator with the greatest responsibility for issues of disclosure, our colleagues at ASIC have taken the lead on this work, as they support and encourage companies to produce more nuanced and reliable climate-related disclosures. This has manifested most notably in their crackdown on greenwashing. Where once upon a time it wasn’t easy being green, in 2022 every company and brand wants to emphasise its environmentally friendly credentials to consumers and investors – but not all are equally deserving of the status. And if everything is “green”, “sustainable” and “ethical”, it risks the terms becoming stripped of meaning and of little use for informed decision-making – far from the high-quality disclosure we’re seeking. Having released an information sheet on avoiding greenwashing last year, ASIC will continue to monitor the market for misleading claims about ESG and sustainability and will take enforcement action against misconduct where needed, including for misleading marketing.
Maximising the potential benefits of disclosure also means ensuring information is comparable, both within Australia and internationally. Globally, steps are well advanced to standardise how climate risks and exposures are disclosed to markets. Most prominent to date has been the Taskforce for Climate-related Financial Disclosures (TCFD) framework, which is now used by an estimated 90 per cent of APRA-regulated entities that publicly disclose their approach to managing climate risks1.
The next step was the establishment last year of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of sustainability disclosures for capital markets. The CFR agencies supported the creation of the ISSB and have helped over the past year gather and submit Australian industry feedback to the Board’s first two proposals, which build on the TCFD recommendations.
Given that any Australian disclosure regime would benefit from alignment with international standards, APRA and the other CFR agencies will continue to closely engage with the ISSB, TCFD and other international organisations in relation to climate-related disclosure. In doing so, we will make sure Australia’s voice is heard around the table as the new frameworks are designed.
Finding a common language
Closely related to this work is the drive to create a common language to disclose these risks and exposures in the form of an Australian sustainable finance taxonomy – a project being led by our Summit hosts today. APRA and the other CFR agencies are part of the Technical Working Group, while Treasury, ASIC and APRA are also observers on the Project Steering Committee.
My experience regulating the superannuation industry over many years– with its endless debates about “comparing apples and oranges” – highlights why this is important. The absence of an agreed and consistent set of definitions hampers disclosure, and creates conditions where misinformation and the selective use of statistics can thrive, undermining the enhanced understanding that greater transparency seeks to achieve. We want to avoid a scenario where reams of climate-related information becomes available that is difficult to interpret or compare, and ensure we are comparing apples with apples as climate risk disclosure becomes embedded across the Australian economy.
Time for action
With the world facing the possibility of a global recession, and the real threat of the war in Ukraine escalating further, climate change will of course be seen alongside other challenges to the finance sector, both transient and enduring. But as we count the cost of the latest major natural disaster, with flooding across the Eastern states – and recognise that there will likely be more frequent and severe natural disasters that Australia must endure – we are reminded that the physical and transition risks of climate change will persist and continue to grow long after the next business cycle has turned.
To make good decisions, stakeholders need high-quality, reliable and comparable information, not all of which either yet exists or is publicly available. Addressing this challenge is firmly on the minds of regulators, but is not solely our responsibility. This challenge will require engagement, action and increased transparency from all market participants to ensure the Australian financial system is ready for whatever nature brings in the years to come.
1 Over two-thirds of institutions (68 per cent) responding to APRA’s climate risk self-assessment said they have publicly disclosed their approach to measuring and managing climate risks, with 90 per cent of those aligning their disclosure to the TCFD framework.
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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.