Planned actions
On 24 February, the Australian Prudential Regulation Authority (APRA) released a letter to all APRA regulated entities outlining plans to:
- develop a new climate related financial risk prudential practice guide;
- develop a climate change financial risk vulnerability assessment in 2020 with a view to conducting the assessment in 2021 (beginning with Australia's largest authorised deposit-taking institutions) (ADIs);
- update superannuation Prudential Practice Guide SPG 530 Investment Governance (SPG 530) which includes paragraphs related to environmental, social and governance (ESG) investments; and
- undertake 'deeper supervisory assessments of each entity that participated in APRA's 2018 climate change survey'. The assessments are due to be completed by mid-2020.
[Note: Separately, APRA has written to industry outlining the key findings of a stress testing assessment it carried out on 28 ADIs and identifying areas for improvement. APRA said that it: expects ADIs to review their internal stress testing framework in light of the findings and that the results of this self-assessment and actions to improve capabilities to be incorporated in subsequent ICAAP reports; that it plans to consult in the second half of 2020 on a stress testing prudential practice guide; that it plans to test resilience to broader scenarios, including the impacts from operational and climate change financial risks; and that APRA will transition to annual stress testing of large ADIs in 2020. For a more detailed summary see: Governance News 26/02/2020]
Details of the new guidance
Climate change financial risk prudential practice guide to be released 'before the end of the year'
The new guidance will be:
- Aligned with the TCFD framework: APRA says that the new cross-industry guidance will cover areas relevant to the prudent management of climate change financial risks, aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), including aspects of governance, strategy, risk management, metrics and disclosure.
- Informed by APRA's engagement with other regulators domestically and internationally, as well as its ongoing engagement with industry participants.
APRA says that the new guidance is not 'intended to establish new obligations, but rather will be designed to assist entities in complying with their existing prudential requirements, including those found in Prudential Standard CPS 220 Risk Management'.
Timing: APRA will consult on the draft Prudential Practice Guide in mid-2020 and, and subject to feedback, plans to publish final guidance before the end of the year.
'Vulnerability assessment' to be designed in 2020 and executed in 2021 commencing with large ADIs
- Entities will be asked to estimate the potential impacts of climate on their balance sheet: APRA says that 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'. The purpose is to APRA provide insights into the impact of climate change on the broader economy.
- Design of the assessment:
- APRA says that the scenarios that will form the basis of the vulnerability assessment will be consistent with practices being developed and utilised by peer regulatory authorities internationally.
- APRA says that it will coordinate with the Australian Securities and Investment Commission (ASIC) and the Reserve Bank of Australia (RBA) via the Council of Financial Regulators to ensure consistency in the application of scenario analysis, disclosure recommendations and to analyse the macro-economic impacts of climate change. In addition, APRA will seek input from the Commonwealth Scientific and Industrial Research Organisation and the Bureau of Meteorology.
- The assessment will begin with Australia's largest authorised deposit-taking institutions (ADIs) with other industries to follow.
- Timing: The ADI vulnerability assessment will be designed in 2020 and executed in 2021, with other industries to follow. APRA notes that the timing aligns with the expected release of international peer regulator guidance on scenario analysis for the banking sector.
Update ESG prudential guidance for superannuation funds
APRA also plans to update Prudential Practice Guide SPG 530 Investment Governance (SPG 530), to assist registrable superannuation entity (RSE) licensees to comply with the requirements in relation to the formulation/implementation of an investment strategy, including in relation to ESG considerations.
Timing: APRA will consult on specific changes to Prudential Standard SPS 530 Investment Governance and SPG 530 'around the middle of the year', in conjunction with other changes to the superannuation prudential framework as part of APRA's response to the post-implementation review.
APRA encourages a proactive approach: APRA says that though the guidance will provide insights into better practice, 'entities should be proactive in taking steps to assess and mitigate climate change financial risks now, and not delay action until further guidance or scenario analysis from APRA is released'.
'Deeper supervisory assessments' due to be completed by mid-2020
In 2018, APRA surveyed 38 large banks, insurers and superannuation trustees in 2018 to assess their views and practices related to climate-related financial risks.
The letter states that APRA considers that the 'data deficit' identified in the 2018 climate change survey can only 'ultimately be tackled through scenario analysis, stress testing and disclosure of market-useful information'.
On this basis, APRA says that it will continue to 'encourage the adoption of voluntary frameworks to assist entities with assessing, managing and disclosing their financial risks associated with climate change, such as the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) recommendations'.
In addition, APRA says that the financial risks of climate change will continue to be a focus of APRA's efforts to increase industry resilience. As such, APRA says that 'more supervisory attention is being given to understanding these risks' including 'deeper supervisory assessments of each entity that participated in APRA's 2018 climate change survey, which are due to be completed in mid-2020'.
