APRA’s Prudential Practice Guide on Climate Change Financial Risks

APRA has released for consultation its draft guidance to banks, insurers and superannuation trustees on managing the financial risks of climate change

Written on 28 April, 2021
Tanaya Das

The Australian Prudential Regulation Authority (APRA) has released for consultation its draft guidance to banks, insurers and superannuation trustees on managing the financial risks of climate change.

The draft Prudential Practice Guide CPG 229 Climate Change Financial Risks will assist APRA-regulated entities in managing climate-related risks and opportunities as part of their existing risk management and governance frameworks.

The National Insurance Brokers Association (NIBA) CEO, Dallas Booth said, “The APRA guidance to directors is clear, the risk impacts of climate change must be carefully considered as part of the overall prudential management of the company’s operations and exposures. For insurance companies, this could well have a direct impact on each insurer’s approach to climate and weather related risks, and this means insurance brokers need to be thinking about the risks associated with climate change and discussing these matters with their clients. NIBA will publish more explanatory information in due course as it comes to hand.”

Chair Wayne Byres said it was important that APRA-regulated entities were prepared to respond to financial risks, whatever form they may take.

“Since the Australian Government became a party to the Paris Agreement, APRA has been raising awareness of climate-related risks to the financial sector. Given the unique and long-term nature of the risks, however, processes to measure, monitor and manage climate-related financial risks are still developing.

“The prudential practice guide doesn’t direct or prevent APRA-regulated entities making any particular business or investment decision. 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,” Byres added.

APRA is seeking stakeholder feedback on the draft CPG 229 by 31 July 2021. Subject to feedback, the final PPG is expected to be released before the end of 2021.

You can access the draft CPG 229 and supporting resource links on the APRA website at: Consultation on draft Prudential Practice Guide on Climate Change Financial Risks.

In response to the release of the Australian Prudential Regulation Authority’s (APRA) draft Prudential Practice Guide on Climate Change Financial Risk, Chief Executive Officer of the Investor Group on Climate Change (IGCC), Emma Herd, said:
“This is critical work from APRA that will go a long way to consolidating accelerating action across the financial sector to address the systemic financial risks created by climate change.”

“The draft APRA guidance sends a clear message to directors and trustees that climate risk is financial risk. It means assessment, disclosure and management of an organisation’s climate risk exposure is clearly identified as being consistent with proper risk management practices and regulator expectations.”

“Other markets are moving to mandatory climate risk disclosure regimes, including New Zealand, the United Kingdom, Hong Kong and potentially the United States. The draft APRA guidance serves as a good basis to begin moving towards a similar mandatory regime in Australia.”