Australian regulator releases climate guidelines

December 2, 2021|Written by Graham Caswell|Australian Prudential Regulation Authority, Reserve Bank of Australia

The Australian Prudential Regulation Authority (Apra) has released final guidance on how financial institutions should manage climate-related financial risks. Aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), the prudential practice guide is largely an educational document and stops short of imposing new regulatory requirements or obligations.

Directors of Australian banks, insurance companies and pension funds should set “exposure limits and thresholds for the [climate-related] financial risks that the institution is willing to bear,” the guide suggests. It calls on managers to implement “proportionate” climate-related governance, risk management, scenario analysis and disclosure practices. Climate risks should also be identified, measured and monitored, and mitigation plans should be developed through engagement with customers and counterparties.

Developed following a consultation process, the prudential advice was broadly welcomed by financial industry stakeholders.

“The guidance is a direct response to requests for more clarity about regulatory expectations and examples of better industry practice,” Apra chair Wayne Byres said in a statement accompanying the document’s publication. “[It] does not prescribe any particular way of doing things. Nor does it force companies to make any particular investment, lending or underwriting decision.”

Despite a recent warning from Philip Lowe, governor of the Reserve Bank of Australia, about international concern over how prepared Australian capital markets are for climate change, the prudential advice offers little beyond an overview of the TCFD recommendations. Instead, financial firms are asked only to “consider external market disclosure”.

However, in recognition of accelerating international movement towards mandatory climate-related disclosures, it warns that “for institutions with international activities there is a need to be prepared to comply with mandatory climate risk disclosures in other jurisdictions”.

Australia is currently experiencing the worst drought in 400 years and is highly vulnerable to the impacts of global heating. The country is also a major coal producer and has one of the highest levels of per capita greenhouse gas emissions in the world.

Apra is currently conducting a climate vulnerability assessment of Australia’s five largest banks, with initial results expected to be released sometime next year.

This page was last updated December 2, 2021

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