Banking News

Climate uncertainty ‘no excuse for inaction’ - APRA

(26 April 2019 - Australia) The Australian Prudential Regulation Authority (APRA) has warned banks and financial services companies there is "no excuse for inaction" on climate change, warning there is a "high degree of certainty" that financial risks will materialise as a result of the warming climate.

The prudential regulator reported the findings as part of a new report in which it rates the sectors it regulates on their actions to address the risks posed by climate change. APRA will increase its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change to their businesses. APRA's increased focus on climate change matches similar moves by the Australian Securities and Investments Commission (ASIC) and Reserve Bank of Australia (RBA).

APRA announced in early 2017 that climate risk is a foreseeable and material risk to financial institutions and that it is an ‘important and explicit’ part of the regulator’s considerations. Directors who fail to properly consider and disclose foreseeable climate-related risks will be held personally liable for breaching their statutory duty of care and diligence under the Corporations Act. Previously APRA’s Environmental, Social and Governance (ESG) guidelines for climate change risks were seen as non-financial matters rather than risks integral to prudent portfolio construction and management. The new guidelines were reviewed recently as part of the regulator’s post-implementation review (PIR) of the superannuation prudential framework to ensure it remains fit-for-purpose. The ESG guidelines were expected to be updated to reflect the latest movement in fiduciary duty and climate risk. APRA confirmed it would not yet introduce specific climate-related prudential standards and instead it will rely on the existing prudential framework, and will be "embedding the assessment of climate risk into its ongoing supervisory activities".

APRA surveyed 38 large banks, insurers and superannuation trustees in 2018 to assess their views and practices related to climate-related financial risks. The survey found a substantial majority of regulated entities were taking steps to increase their understanding of the threat, including all of the banks, general insurers and superannuation trustees surveyed. Respondents also described the strategic opportunities they had identified from the transition to a low carbon economy, including developing innovative products and services, and meeting the growing demand for green investment opportunities. A minority of companies, under 20 percent, were meeting voluntary climate risk disclosure targets set out by the Task Force on Climate-related Financial Disclosures, an international private sector initiative chaired by US billionaire Michael Bloomberg that includes many of the world's biggest financial institutions. All banks, super funds and general insurers surveyed were taking active steps to understand climate risk. But only 60 percent of private health funds, and 40 percent of life insurers said they were doing so. Other key findings included: 

• A third of respondents believed climate change was a material financial risk to their businesses now and a further half thought it would be in future;
• A majority of banks considered climate-related financial risks as part of their risk management frameworks; and
• Reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.

Overall climate risk was seen as a future rather than immediate risk, with just a third saying it was affecting them now. This was reflected in the risk categories of most concern. Number one was reputational risk – suggesting financial services companies are most concerned with public perception that they are not doing anything to mitigate climate risk. Number two was flood risk, followed by regulatory, cyclone, energy and bushfire risks. Only a minority overall said climate change would pose no material risk, though 20 percent of life insurers fell into this category. While financial institutions had a clear answer to the question of who in the business was responsible for climate change policy, APRA found life insurers "identified no specific employee responsible for climate-related financial risks". Australia's Big Four majors joined forces with insurers and superannuation funds to launch the "Australian Sustainable Finance Initiative" earlier this year, an initiative that aims to reshape the financial system to deal with climate change. The group also includes fund managers, lawyers, academics and industry groups, and will be overseen by APRA.

APRA Executive Board Member Geoff Summerhayes said APRA had a responsibility to ensure financial institutions were alert to issues that could impact their ability to fulfil promises to customers - “The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers. Companies that fail to respond to these forces risk being left behind. Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over coming years. APRA expects that climate risks be assessed within existing prudential risk management standards CPS 220 and SPS 220, and supervisors will be factoring this into their ongoing supervisory activities.”