APRA Outlines Next Steps in Key Climate-related Initiatives

APRA will consult on a draft prudential practice guide on climate-related financial risk within H1. The first results of big banks’ climate vulnerability assessments will be ready by Q4.

APRA (Australian Prudential Regulation Authority) has published a paper to all APRA-regulated entities outlining its plans to respond to climate-related financial risks.

In February 2020, APRA announced plans to develop a prudential practice guide setting out its expectations for how regulated entities should respond to climate-related financial risks, as well as to commence a Climate Vulnerability Assessments (CVA) pilot programme in the financial sector.

“By pushing regulated entities to move more swiftly from awareness to action, APRA aims to ensure these institutions are equipped to adapt and respond to the substantial changes in the international economic and regulatory environment that are in train,” the regulator said in its quarterly publication Insight, released last week.

APRA had initially planned to consult on a draft prudential practice guide on climate-related financial risk in mid-2020, with a view to publishing the final guidance by end-2021. However, due to the Covid-19 pandemic, APRA now plans to release the draft guide for consultation in the first half of this year, and finalise by end-2021.

The prudential practice guide is designed to be “helpful guidance as to how regulated entities can fulfil their prudential obligations in relation to risk management when it comes to climate-related risks,” APRA said.

“Drawing on aspects of the TCFD, as well as other international regulatory initiatives and precedents, the [prudential practice guide] will support the Australian finance sector as it seeks to effectively address climate-related risks.”

The CVAs meanwhile will leverage work from the NGFS (Network of Central Banks and Supervisors for Greening the Financial System) and other initaitives – providing the “first-of-its-kind assessment of banking industry climate-related risks in Australia.”

The CVA’s will assess the vulnerability of institutions, the financial system and the economy to both physical and transition risks arising from climate change, as well as boost understanding of how financial institutions may adjust their business models in response to the challenges presented by different scenarios.

“In addition, the CVAs will build enhanced capability for assessing the emerging macroeconomic and prudential risks of climate change for Australia more broadly,” the regulator said.

Initially commencing with the five largest banks. APRA expects to have its analysis of the CVA results relating to the major banks completed by Q4 this year.

The CVAs will eventually be rolled out across the rest of the banking sector, as well as the insurance and superannuation sectors, though a final timetable has not yet been confirmed.