The Australian Prudential Regulation Authority (APRA) has started quizzing insurers, superannuation funds and banks about their awareness of climate change risks and what action may be required. The regulator will increase disclosure around climate risk exposure and management.
APRA executive board member Geoff Summerhayes, in a speech last week on the theme of “Building a sustainable economy”, said: "Increasingly, APRA will expect more sophisticated answers, especially from well-resourced and complex entities."
He also outlined plans for an industry-wide review of climate-related disclosure, warning insurers, superannuation funds and banks that they place their "futures in jeopardy" by ignoring risks related to climate change.
"Shifts in market sentiment have increased the risk of asset value volatility, and for the potential for stranded assets. Institutions that fail to adequately plan for this transition put their own futures in jeopardy, with subsequent consequences for their account holders, members or policyholders."
In February, Mr Summerhayes warned financial institutions that climate change must be viewed as a risk management issue for business, with these risks "foreseeable, material and actionable now".
Since February, APRA has established an internal Climate Change Financial Risk Working Group to develop its supervisory response. The group is responsible for updating APRA staff on relevant developments, and providing training and high-level guidance for supervisors. To aid APRA’s understanding of the risks, the group is also developing a cross-industry heat map, identifying the key climate-related risks across each of the industries it regulates.
As APRA identifies entities with better climate risk practices, it will further engage those institutions to gain a deeper understanding of how they approach, measure and manage these risks, and share this as industry guidance.
Through such initiatives, APRA intends to gain insights in areas such as how exposed regulated entities are to physical, transitional and liability risks, and whether they’re taking steps to protect themselves and their customers.
"So whether due to regulatory action or – more likely – pressure from investors and consumers, Australia's financial sector can expect to see more emphasis on disclosure around climate risk exposure and management," Mr Summerhayes said.
APRA has also continued to liaise with international peers to ensure Australia’s supervisory response to climate risk is aligned with global best practice.
Mr Summerhayes also said: “To date, APRA hasn’t conducted any stress tests specifically related to climate risk, but in the future we will consider doing so. In the meantime, we encourage entities to perform their own stress tests that consider such scenarios.”
He said that for now, APRA's focus is on raising awareness rather than prescribing additional prudential standards, though consideration may be given to updating prudential guidance.