Australian prudential authority pushes banks to assess climate risk

September 8, 2021|Written by David Clarke|Reserve Bank of Australia

Australia’s financial regulator has published details of a climate vulnerability assessment being carried out by the country’s biggest banks to assess the nature and extent of the risks they may face due to climate change.

The initiative uses scenarios developed by the Network for Greening the Financial System (NGFS), and is intended to help banks measure, monitor and manage their climate risk. Regulators also hope the exercise will help them to understand the risks facing the financial system as a whole.

Despite the country’s vulnerability to extreme weather and the economic costs associated with climate-related disasters, the largest banks have continued to lend to expansionary fossil fuel projects in recent years. Experts have warned that the financial system is not moving fast enough to grapple with the risks posed by the climate crisis.

Australia ranked 10th among G20 economies for its approach to climate risk in Positive Money’s Green Central Banking Scorecard earlier this year. The Reserve Bank of Australia and the Australian Prudential Regulation Authority (APRA) received just four out of 50 for their record on financial policy, far behind their counterparts in Europe and China.

A report by the Australian National Centre for Climate Restoration (Breakthrough) acknowledged the introduction of the climate vulnerability assessment, but criticised its attempt to test against scenarios of up to 3C of warming. The consequences of such a temperature rise would be so severe that the banking system may not even survive, the paper warns.

Instead, the group recommends that instead of placing too much emphasis on disclosure,  policymakers should take “emergency precautionary action” and focus on mitigating climate risks via regulation.

The NGFS climate scenarios utilised by the climate vulnerability assessment have been questioned for relying on unproven carbon capture and for failing to acknowledge the need to end new fossil fuel investment.

The assessment, overseen by the APRA, has been underway since June. The first analysis is due to be submitted by the end of 2021 with initial results published next year.

This page was last updated September 9, 2021

Share this article