More work needed on climate risk, says Australian regulator

August 11, 2022|Written by |Australian Prudential Regulation Authority

The Australian Prudential Regulation Authority (Apra) has released results of a climate risk survey of large and medium sized banks, insurance and superannuation companies. It reveals that regulated entities are generally well aligned to previously issued guidance but have yet to fully embed climate risk across their risk management frameworks.

The voluntary survey, completed by 64 financial institutions, suggests that while board-level oversight of climate risk is widespread in the Australian financial sector, performance is much weaker in the area of metrics and targets.

This is the first climate risk survey undertaken by Apra since the regulator’s prudential guide on climate change financial risks was finalised in November 2021.

Almost 40% of institutions responding to the survey said that climate-related events could have a material or moderate impact on their direct operations. Four out of five boards oversee climate risk on a regular basis and 63% have incorporated climate risk into their strategic planning process.

However, while 73% of respondents said they had one or more climate-related targets in place, 23% do not have any metrics to measure and monitor climate risks at all. Unsurprisingly, climate risk management is more developed in larger institutions with greater resources.

Banks showed the weakest performance, with just 30% using a formal process to identify climate risks and 58% focusing only on short-term impacts of one-to-five years. Nearly half of banks reported that they do not assess emissions from their wholesale lending.

The results of the exercise also come with a caveat. “Given the voluntary nature of the survey, it may be that institutions which are more invested in the management of climate risks are more likely to have responded to the survey, and that this may be reflected in the overall survey outcomes at cross-industry and industry levels,” Apra said, also warning of differences in the way individual institutions self-assess their climate risk management practices.

“The survey findings indicate that most participants are taking this issue seriously,” said Apra deputy chair Helen Rowell. “However, they also underline that this remains a relatively new and evolving area of risk management, especially with regards to setting metrics and targets.”

Australia has recently experienced a series of record-breaking wildfires, floods and other extreme weather events associated with climate change. The country is also a major coal producer and has one of the highest levels of per capita greenhouse gas emissions in the world.

This page was last updated August 11, 2022

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