Rising climate-risk disclosure demands on companies, APRA warns

Companies should brace for ‘rapidly increasing expectations’ on climate risk disclosure arising from the transition to a low-emissions economy, APRA warns.

Companies should brace for ‘rapidly increasing expectations’ on climate risk disclosure, APRA warns. Picture: Barry Jonsberg

The prudential regulator has warned companies to prepare for “rapidly increasing expectations” on climate risk disclosure arising from the transition to a low-emissions economy.

Releasing the findings from its climate risk self-assessment survey of 64 medium-to-large institutions, the Australian Prudential Regulation Authority said on Thursday that regulated entities were generally adjusting well to regulatory guidance on managing the financial risks and opportunities arising from a changing climate.

This was particularly so in the areas of governance and disclosure.

However, climate risk was an emerging discipline, with only a small proportion of respondents indicating they had fully embedded climate risk in their risk management framework.

APRA deputy chair Helen Rowell said the findings were encouraging but there was more work to do.

“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 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.

“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.”

APRA deputy chair Helen Rowell. Picture: Stefan Postles/AAP Image

Submissions closed earlier this week on draft standards from the International Sustainability Standards Board on general sustainability and climate-related disclosure standards.

Final standards, which are expected to pave the way for verifiable financial information and comparability, are scheduled for release before the end of the year.

They are seen as a precondition to debt and equity investors funding the transition to net-zero emissions by 2050.

Among other things, the APRA survey found that four out of five boards regularly oversaw climate risk, with just two-thirds incorporating climate risk in their strategic planning process.

Almost 40 per cent of institutions said climate-related events could have a material or moderate impact on their operations, and nearly three-quarters said they had one or more climate-related targets in place, although 23 per cent did not have any metrics to measure and monitor climate risk.

Two-thirds of institutions said they had publicly disclosed their approach to measuring and managing climate risk, with 90 per cent of those aligning their disclosure to the Taskforce for Climate-Related Financial Disclosures.

An information paper on the survey said understanding of climate change and stakeholder expectations was rapidly evolving.

“Institutions are increasingly required to continually adapt their own practices in response to the evolving scientific, regulatory and stakeholder landscape,” the paper said.

“Disclosure and metrics are areas where investors, standard-setters, and peer regulators are seeking more sophisticated climate risk information.

“Although the survey responses indicated that many institutions are publicly disclosing their approach to measuring and managing climate risks, the quality and comprehensiveness of disclosures vary, and institutions need to be prepared for rapidly increasing expectations.”

This included the growing importance of measuring and disclosing Scope 3 financed emissions, which would help institutions to understand the potential impact of climate change on their customers, counterparties, and organisations to which they had exposure.

The paper said data quality and availability remained a challenge.

“However, such challenges should not be used as justification for delay, but rather as a driver for exploring different options that will continue to evolve and mature over time,” the paper said.

“For example, sectoral or geographic emissions data could be used as a proxy when more granular data is not available, while qualitative narrative-driven analysis and risk scores could also be used.”

Originally published as Rising climate-risk disclosure demands on companies, APRA warns