More work required by banks managing climate risks

  • By Zilla Efrat

Encouraging but there’s more work to be done. That was the view of Helen Rowell, deputy chair of the Australian Prudential Regulation Authority yesterday when releasing the findings of APRA’s latest climate risk self-assessment survey.

“Climate change and the global response to it are creating financial risks for banks, insurers and superannuation trustees, whether it be the physical damage from floods or bushfires, or asset price volatility as consumer and investor demands evolve,” she said.

The voluntary survey, issued in March this year, was designed to provide insights into how APRA-regulated entities are aligning their practices with the expectations set out in Prudential Practice Guide CPG 229 Climate Change Financial Risks.

Released last November, CPG 229 provides APRA-regulated entities with guidance on managing the financial risks and opportunities that may arise from a changing climate.

The responses from the 64 medium to large institutions surveyed suggest they are generally aligning well with APRA’s guidance, especially in the areas of governance and disclosure.

Climate risk, however, remains an emerging discipline compared to other traditional risk areas, with only a small portion of survey respondents indicating that they have fully embedded climate risk across their risk management framework, says APRA.

Based on the entities’ self-assessments, four out of five boards oversee climate risk regularly, while just under two-thirds of institutions (63 per cent) have incorporated climate risk into their strategic planning process.

Almost 40 per cent of institutions believe climate-related events could have a material or moderate impact on their direct operations. And nearly three-quarters of institutions (73 per cent) said they had one or more climate-related targets in place.

Of concern was that 23 per cent of institutions did not have any metrics to measure and monitor climate risks.

On the other hand, over two-thirds of institutions (68 per cent) said they have publicly disclosed their approach to measuring and managing climate risks, with 90 per cent of those aligning their disclosure to the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

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

“With stakeholder expectations on climate risk only going to rise further in coming years, we urge all regulated entities – not only those involved in the survey – to consider the findings and reflect on their preparedness.”