Financial risks must consider cost of climate change: APRA

By Grace Ormsby

February 28 2020
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Australia’s prudential banking regulator has acknowledged the financial risks associated with climate change, saying it will be developing a practice guide and a vulnerability assessment for financial institutions.

Financial risks must consider cost of climate change

An open letter from the Australian Prudential Regulation Authority’s (APRA) executive board member Geoff Summerhayes has revealed how looking ahead, “the financial risks of climate change will continue to be a focus of APRA’s efforts to increase industry resilience”.

Mr Summerhayes highlighted how many industry participants have indicated they would like APRA to provide more information on better industry practice in relation to climate-related financial risks.

He noted how a number of large entities already understand the financial risks and opportunities arising out of a changing climate.

Following on from that, the authority has recognised a need to address the climate data deficit and quantify the likely impact of the physical, transitional and liability risks of climate change as well as appropriately assess and price such risks.

According to the letter, this “needs to ultimately be tackled through scenario analysis, stress testing and disclosure of market-useful information”, and will allow well-managed entities to minimise their costs and optimise any benefits.

As a result, APRA is intending to develop and consult on a climate change financial risk prudential practice guide.

This won’t establish new obligations on authorised deposit-taking institutions and financial service providers, Mr Summerhayes said.

Instead, it is designed to “assist entities in complying with their existing prudential requirements”.

In addition to the practice guide, the executive indicated APRA will be seeking to undertake a climate change financial risk vulnerability assessment, beginning with Australia’s largest authorised deposit-taking institutions.

Mr Summerhayes explained how “the vulnerability assessment will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy”.

APRA will undertake this work in conjunction with the Reserve Bank of Australia and the Australian Securities and Investments Commission.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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