10 February 2022
APRA's Guidance on Managing Financial Risks of Climate Change
On 26th November 2021, The Australian Prudential Regulation Authority (APRA) released its final prudential practice guide on climate change financial risks, following consultation on the draft Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) released in April 2021.
The guide is designed to assist banks, insurers and superannuation trustees to manage the financial risks of climate change. The guide imposes no new regulatory requirements or obligations, but will instead assist APRA-regulated entities to manage climate-related risks and opportunities within their existing risk management and governance practices.
The guide covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure of climate-related financial risks. It is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.
Feedback to the consultation, which received nearly 50 submissions from a diverse range of stakeholders, broadly welcomed the draft guidance. Some stakeholders, however, sought a greater level of prescription in response to concerns that they may lack adequate capabilities or resources to address the financial risks of climate change.
In response to feedback to the consultation, APRA has made minor amendments to CPG 229 related to capital adequacy, the use of climate-related targets, and disclosing key design features of scenario analysis. While additional clarity has been provided in some areas in response to requests for more prescription, APRA has endeavoured to maintain a principles-based approach to the guidance to ensure it remains flexible, applicable to a wide range of institutions, adaptable to the evolving external environment, and complimentary to APRA’s existing risk management and governance requirements.
APRA-regulated entities are encouraged to begin using the finalised guidance immediately to enhance their management of climate change financial risks in a manner that is appropriate to their business and its particular circumstances.
During 2022 APRA intends to undertake a survey to help gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures. In addition, APRA continues to advance its climate-related program of activities, including the climate vulnerability assessment that is underway with Australia’s five largest banks.
The full CPG 229 is available here - https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf
The guide is designed to assist banks, insurers and superannuation trustees to manage the financial risks of climate change. The guide imposes no new regulatory requirements or obligations, but will instead assist APRA-regulated entities to manage climate-related risks and opportunities within their existing risk management and governance practices.
The guide covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure of climate-related financial risks. It is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.
Feedback to the consultation, which received nearly 50 submissions from a diverse range of stakeholders, broadly welcomed the draft guidance. Some stakeholders, however, sought a greater level of prescription in response to concerns that they may lack adequate capabilities or resources to address the financial risks of climate change.
In response to feedback to the consultation, APRA has made minor amendments to CPG 229 related to capital adequacy, the use of climate-related targets, and disclosing key design features of scenario analysis. While additional clarity has been provided in some areas in response to requests for more prescription, APRA has endeavoured to maintain a principles-based approach to the guidance to ensure it remains flexible, applicable to a wide range of institutions, adaptable to the evolving external environment, and complimentary to APRA’s existing risk management and governance requirements.
APRA-regulated entities are encouraged to begin using the finalised guidance immediately to enhance their management of climate change financial risks in a manner that is appropriate to their business and its particular circumstances.
During 2022 APRA intends to undertake a survey to help gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures. In addition, APRA continues to advance its climate-related program of activities, including the climate vulnerability assessment that is underway with Australia’s five largest banks.
The full CPG 229 is available here - https://www.apra.gov.au/sites/default/files/2021-11/Final%20Prudential%20Practice%20Guide%20CPG%20229%20Climate%20Change%20Financial%20Risks.pdf