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Strengthening Climate Change Risk Management

Thursday 4 August 2022

While APRA -regulated entities are doing good job  following regulatory guidance in governance and disclosure, but still have a lot of work to do in embedding climate risk across their organisations.

This week results  climate change risks self-assessment survey of alignment of medium to sixty-four large banks, insurance, and superannuation with the Prudential Practice Guide CPG 229 Climate Change Financial Risks

When the survey was the released in March APRA outgoing chair said in a formal statement, “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. CPG 229 is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice.”

However, APRA Deputy Helen Rowell indicated that even with CPG 229 more work needs to be done by APRA regulated entities.

“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.”
The survey found that most instituitons the were taking the taking equally quantitative and qualitative approach thought many respondents started initially with a qualitative approach:

Where institutions are in their early stages of developing their climate risk management practices, the responses show that they initially focus on qualitative aspects such as governance and risk management: this is appropriate, as it ensures that subsequent quantitative climate risk activities are carried out within robust risk and governance frameworks.

Another finding from the  report found a ‘positive correlation ‘ between the risk management maturity and the size of the organisation:

This likely reflects the investment by larger institutions into understanding climate risk, and potentially other drivers (such as the Climate Vulnerability Assessment2 and reputational drivers) in incentivising action on climate risk. 

The prudential regulator  highlighted some key observations form the report in a formal statement this week:
  • four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions (63 per cent) have incorporated climate risk into their strategic planning process;
  • almost 40 per cent of institutions said climate-related events could have a material or moderate impact on their direct operations; 
  • nearly three-quarters of institutions (73 per cent) said they had one or more climate-related targets in place, however 23 per cent of institutions do not have any metrics to measure and monitor climate risks; and
  • over two-thirds of institutions (68 per cent) said they have publicly disclosed their approach to measuring and managing climate risks, with 90 per cent of those aligning their disclosure to the Taskforce for Climate-related Financial Disclosures1 (TCFD) framework.
Rowell continued, “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.”