APRA has released its draft Prudential Practice Guide CPG 229 on managing climate change financial risks.
‘Climate risks’ in the guide refers to ‘financial risks arising from climate change, including physical, transition and liability risks.’ This guidance note applies to banks, insurers and superannuation trustees.
The guidance note does not create new obligations and seeks to align with the Task Force on Climate Related Financial Disclosures. While there are currently no specific legal requirements to report on climate risk, APRA and ASIC have been clear that climate risk is a relevant risk to be disclosed and addressed as part of current obligations under the Corporations Act 2001 (Cth), such as section 1013D(1)(l), section 299A(1), Corporations Regulation 7.9.14C, and such as APRA risk management and governance standards CPS 220, SPS 220, CPS 510 and SPS 510.
There has been much interest from the financial services industry for greater clarity as to how regulators expect these existing legal obligations to be met. The APRA guidance note seeks to provide this greater clarity by covering APRA’s views on best practice.
Indeed, the release of this note comes at a time of heightened attention to mitigating climate risk and a time when the Federal Government has all but committed to a net zero target by 2050, given increasing political pressure. As part of this shift, the Government will no doubt be placing greater scrutiny on how different sectors of the economy, including financial services, are helping to contribute to this goal by mitigating climate risk and dealing with climate risk to their own businesses. In turn, industry will be keen for greater certainty around best practice expectations.
The guidance note is very high level, covering general principles in areas APRA views as relevant to the prudent management of climate change financial risks:
- Governance: the draft note includes general principles on the role of boards and senior management in addressing climate risk via an institution’s overall business strategy.
- Risk management: the draft note outlines general principles on establishing policies and procedures for risk identification to the business, monitoring risk, and reporting risk to the board and senior management.
- Scenario analysis: the draft note calls for the development and conducting of climate scenario analysis and stress testing methodology, both qualitative and quantitative.
- Disclosure: the draft note recognises the need for disclosures that evolve and improve overtime in comprehensiveness, relevance and clarity in order to give confidence to the market in the institution’s approach to climate risk.
Given the high-level nature of the draft note’s content, there may be benefit in further work being undertaken at an industry level to provide the greater clarity around best practice that the industry is seeking. APRA understands that this is an area that is evolving and will improve over time, and so its draft note expectations are flexible enough to allow industry specific development to occur.
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