APRA issues final guidance on climate change risks

Australia’s banking regulator has urged the financial services to “immediately” start using the regulator’s guide on climate change risks.

APRA has urged the financial services industry to “immediately” start using the regulator’s final practice guide on climate change risks, which maintains a principles-based approach but incorporates some minor changes in some areas.

The changes relate to capital adequacy, the use of climate-related targets, and disclosure of key design features in scenario analysis.

Australian Prudential Regulation Authority chair Wayne Byres said the transition to a lower-emissions economy created financial risks for which businesses needed to prepare.

“Recent developments, including the Australian government’s commitment to net zero emissions by 2050, underscore the trajectory the world is on in response to climate change,” Mr Byres said.

“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws or adjustments in asset values, but they don’t always have a good understanding of how to respond.

“(The practice guide) is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice.”

The APRA chief said the guide did not prescribe any particular way of doing things, or force companies to make any investment, lending or underwriting decision – those were matters for the entities themselves to decide.

However, the regulator wanted to make sure those decisions were well-informed, and didn’t undermine the interests of bank depositors, insurance policyholders or superannuation members.

APRA’s handling of climate-related targets in the final guide highlights the regulator’s principles-based approach, with the guide containing a new provision saying that any targets should be aligned to the institution’s business strategy and risk management framework.

The targets can also reference external benchmarks such as sector, national or international targets.

While the feedback in nearly 50 submissions on the draft guidance was broadly positive, APRA said some parties sought a greater level of prescription because of concerns that they lacked adequate capabilities or resources to address the financial risks of climate change.

In 2022, APRA said it would undertake a survey to help gauge the alignment between institutions’ management of climate change financial risks, the new guidance, and the Financial Stability Board’s taskforce for climate-related financial disclosures.

The regulator said it was also working on its climate-related program of activities, including the climate vulnerability assessment underway with Australia’s five largest banks.