APRA Issues Draft Guidance on Climate-related Financial Risk

The consultation says institutions and boards may face liability risks if they do not adequately consider or respond to the impacts of climate change.

APRA (Australian Prudential Regulation Authority) has issued draft guidance for banks, insurers and superannuation trustees on managing climate-related financial risks.

The draft prudential practice guide (PPG 229) was developed in response to requests from industry for greater clarity of regulatory expectations and examples of better industry practice for managing climate change financial risks.

The guidance covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure. It is designed with flexibility in mind, to allow institutions to adopt an approach that is appropriate for its size, customer base and business strategy, APRA said.

With regard to scenario analysis, APRA said it will in due course share lessons from its ongoing CVA (climate vulnerability assessment) involving Australia’s largest banks. APRA has previously said it expects to have its analysis of the CVA results completed by Q4 this year.

“The prudential practice guide doesn’t direct or prevent APRA-regulated entities making any particular business or investment decision,” said APRA Chair Wayne Byres. “Rather, it is aimed at ensuring decisions are well-informed and appropriately consider both the risks and opportunities that the transition to a low carbon economy creates.”

Among the climate-related financial risks APRA outlines in the consultation, it notes that institutions and boards may face liability risks and litigation if they do not adequately consider or respond to the impacts of climate change.

The draft CPG 229, available here, is open for comment until 31 July 2021. A letter to APRA regulated entities on the consultation is available here.

The final PPG 229 is expected to be released before the end of 2021.

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