APRA eyes prudential framework for climate risks

  • By Christine St Anne

The prudential regulator plans to implement prudential guidance on climate-related financial risks as well as a climate change vulnerability assessment that will begin with the big banks. 

The move was singalled in an annoucement made by APRA last Friday where the prudential regulator indicated that it aimed to increase its focus on how banks are stress testing their portfolios against climate change, following key findings in its stress testing assessment.

“The effects of a changing climate extend to all sectors of the economy,” APRA said in a letter to banks and superannuation funds on Monday.

“Those effects are being transmitted directly as well as indirectly, through changing policies, technological developments, investment and consumer preferences. They pose financial risks, as well as provide new business opportunities.” 

APRA plans to update its financial risk prudential guide PPG but this does not mean any new obligations. 

Rather it will be developed to help banks comply with their existing prudential requirements including those found in the prudential standard CPS 220 Risk Management.

The guidance will cover areas relevant to the prudential management of climate change financial risks, aligned with the recommendations of the Financial Stability Boards’ Task Fore on Climate-related Financial Disclosures, including aspects of governance, strategy, risk management, metrics and disclosure.

The prudential regulator will also get buy-in from other regulators both in Australia and overseas as well as “ongoing engagement with industry participants”. 

APRA will consult on the draft PPG in mid-2020 and, subject to feedback, will seek to publish final guidance before the end of the year.

In collaboration with these international and local stakeholders, APRA will be seeking to undertake a climate change financial risk vulnerability assessment. 

The assessment will begin with Australia’s largest banks. 

The vulnerability assessment will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy.

APRA said that by beginning with the banking sector industry this “will provide helpful insights on the impact of a changing climate on the broader economy, which will be analysed in conjunction with the Reserve Bank of Australia”. 

The bank vulnerability assessment will be designed in 2020 and executed in 2021, with other industries to follow. 

This timing also aligns with the expected release of international peer regulator guidance on scenario analysis for the banking sector.

This project will also involve the Council of Financial Regulators – that include ASIC and the RBA. 

RFi Group’s Mortgage Innovation Summit will include a climate change panel that will assess the risks for banks.