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APRA to step up scrutiny of climate risks after releasing survey results

Wednesday 20 March 2019

The Australian Prudential Regulation Authority (APRA) will increase its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change to their businesses.

Releasing the results of its first climate risk survey of regulated entities today, APRA called on entities to move from gaining awareness of the financial risks to taking action to mitigate against them.

APRA surveyed 38 large banks, insurers and superannuation trustees last year to assess their views and practices related to climate-related financial risks. The survey found a substantial majority of regulated entities were taking steps to increase their understanding of the threat, including all of the banks, general insurers and superannuation trustees surveyed.

Other key findings were:  

  • A third of respondents believed climate change was a material financial risk to their businesses now and a further half thought it would be in future;
     
  • A majority of banks considered climate-related financial risks as part of their risk management frameworks; and
     
  • Reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.
     
Respondents also described the strategic opportunities they had identified from the transition to a low carbon economy, including developing innovative products and services, and meeting the growing demand for green investment opportunities.

APRA Executive Board Member Geoff Summerhayes said APRA had a responsibility to ensure financial institutions were alert to issues that could impact their ability to fulfil promises to customers.

“The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers. Companies that fail to respond to these forces risk being left behind.

“Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over coming years.

“APRA expects that climate risks be assessed within existing prudential risk management standards CPS 220 and SPS 220, and supervisors will be factoring this into their ongoing supervisory activities,” Mr Summerhayes said.

Today’s Information Paper also contains a stocktake of actions and initiatives underway in Australia and internationally in response to growing awareness of the physical, transitional and liability risks of climate change.

“APRA’s views on the economic risks of climate change, recently echoed by the Reserve Bank of Australia, are consistent with those of financial regulators internationally. These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing,” said Mr Summerhayes, who is also Chair of UN Environment’s Sustainable Insurance Forum.

Copies of the Information Paper containing the full survey results are available on APRA’s website at: https://www.apra.gov.au/information-papers-released-apra.

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 $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.