“Where an institution has identified material climate risks, a prudent institution would establish and implement plans to mitigate these risks and manage its exposures, as well as regularly review and assess the effectiveness of those plans,” the final prudential practice guide (CPG 229) says.
APRA recognises “how and when specific climate risks will materialise is uncertain”, but says “there is a high degree of certainty that some financial risks will materialise as a result of climate change. An institution can mitigate the magnitude of the impacts of these financial risks through governance, risk management, scenario analysis and disclosure.”
Response to risk important
APRA said the guide contained no new regulatory requirements or obligations but would help institutions map out processes to “discuss, set clear roles and responsibilities of senior management in the management of climate risks”. It wants them to begin to use it immediately.
The guide says that for boards of directors to fulfil their role under APRA’s prudential standard on governance, they need to ensure that “where climate risks are found to be material, the institution’s risk appetite framework incorporates the risk exposure limits and thresholds for the financial risks that the institution is willing to bear”.
APRA chairman Wayne Byres pointed to COP26 and the federal government’s commitment to net zero emissions by 2050 and said this created financial risks that businesses needed to be prepared for.
“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,” he said.
APRA received almost 50 submissions on the guidance; some sought a greater level of prescription compared to draft guidance first circulated in April.
APRA is also conducting “climate vulnerability assessments” on the major banks and Macquarie.
In overseeing the financing transition, Mr Byres said APRA was guided by its core responsibility to protect deposit holders.
The APRA guidance was released an hour before ANZ Bank was due to update the market on its oil and gas lending policy in a special ESG briefing.
