The Australian Prudential Regulation Authority (ARPA) has released an information paper summarising the findings of voluntary climate risk self-assessment survey completed by 64 medium to large APRA-regulated entities across the banking, insurance, and superannuation sectors.  

The purpose of the exercise was to provide insights into the extent to which participating entities consider their current approach to climate risk management and disclosure – ie their formally implemented and documented approach at the time of completing the survey – to be in alignment with the guidance in APRA’s Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229). 

The headline message is that overall, APRA-regulated entities are in the early stages of implementation – only a small group of survey respondents reported that they have fully embedded climate risk across their risk management framework.  

Commenting on the survey findings overall, APRA Deputy Chair Helen Rowell said:

'The survey findings indicate that most survey participants are taking this issue [climate risk] seriously, however they also underline that this remains a relatively new and evolving area of risk management, especially with regards to setting metrics and targets.

With stakeholder expectations on climate risk only going to rise further in coming years, we urge all regulated entities – not only those involved in the survey – to consider the findings and reflect on their preparedness'.

We summarise the key findings of the survey below.

Governance and Strategy

Governance of climate related risk emerged as an area of (relative) strength based on the survey findings (which, it should be noted have not be validated by the regulator).  

For example:

• The findings indicate there is a high level of board engagement on the issue: 80% of participating entities reported that their board/board committee oversee climate risk on a regular basis and 19% reported this occurred on an ad hoc basis.  Overall APRA considers that the findings demonstrate that 'almost all boards oversee climate risk to some degree'. 
• Board capability/training in climate risk: 
  • 77% of participating entities reported that their board/subset of their board had undertaken climate risk focussed training, with 58% reporting that this had occurred in the last 12 months. 
  • 42% of entities reported that climate risk has been considered in the composition of the board with one or more board members having climate or ESG experience/expertise.  
• Staff training in climate-related risk: 80% of survey participants reported that climate risk training had been provided to a target group of staff.  The groups most likely to receive training were: executive level management; independent risk management functions and front-line business teams.  APRA comments that leading institutions also reported providing optional or mandatory training to all staff.

Formal delegation of responsibility

APRA considers the findings (noted below) suggest that 'this is a relatively less mature area, and APRA considers it appropriate for institutions to formally articulate functional roles and responsibilities as a matter of good practice'.

• Overall, 75% of participating entities reported they have formally delegated the management of climate risk to senior management positions and/or to a management committee.  Superannuation funds stand out as leaders in this area – 90% reported they had formal delegations in place.  APRA comments that it would have expected the overall figure to be higher given the fact that 'almost all' institutions report their board oversees climate risk to some degree.
• Delegation of roles/responsibilities across the three lines of defence:
  • 34% of participating entities reported that they have defined roles/responsibilities across all risk functions (ie business lines, independent risk, and assurance functions) in line with 'best practice'. 
  • Looking at it by sector: 29% of banks, 38% insurers and 35% of superannuation funds reported that they had done so.  

Room to improve: Strategic planning

APRA considers that the findings indicate that 'integrating climate risk into strategic planning has some way to go'.  For example:

• 63% of entities reported having incorporate climate risk into their strategic planning process.  
• However, this does not mean that entities consider the shorter term (1-5 years), medium term (5-10 years) and longer term impacts of climate risk.  The findings indicate that most entities who report that they have incorporated climate risk into their strategic planning processes are focussed on the short term impacts only.  For example: 58% of banks and 46% of insurers report that they only consider the short term (1-5 year impacts) of climate risk.  Only 33% of banks and 44% of insurers reported that they consider long term climate impacts in their strategic planning processes.  
• Superannuation funds are the exception to this.  85% of funds reported they consider short term climate impacts, 77% reported they consider medium term climate impacts and the same proportion (77%) report they consider long-term climate impacts in their strategic planning.  

APRA flags that these findings suggest that a number of institutions that have set medium to longer term targets (ie climate-related targets that extend to 2030 and 2050), have not considered medium-to longer term climate risk impacts in their strategic planning.  APRA advises that: 

'At a minimum, these institutions should formally consider the longer-term climate risks, and how those risks may impact the institution’s plan to achieve its targets and commitments.'

Risk Management – Climate risk not as embedded into risk management frameworks as other forms of risk

The findings suggest that participating entities have started to embed climate risk into elements of their risk management framework but the extent to which they have done so varies considerably with 'only a small portion' of institutions reported that they have embedded climate risk into their risk management framework to the same extent as other risk types.  The least progressed areas were capital adequacy (for relevant institutions) and training and capacity building.  The most progressed areas were management reporting and information systems, and governance structure and composition.

Looking more closely, APRA found that: 

• Most survey participants (81%) reported having a formal process in place to identify material climate risk.  However, only 48% reported that they undertake this exercise regularly, while 13% reported they did so on an ad hoc basis.  
• 22% of entities reported they are unsure of their vulnerability to physical and transition risks.  
• 72% of survey participants reported that they undertake scenario analysis, with 54% of participants reporting that they consider three or more scenarios.  
• 67% of respondents reported they have considered potential liability originating from clients, counterparties, members, or other stakeholders.  Looking at it by industry, superannuation funds were the most likely to have considered liability risk (88%)
• 83% of respondents reported that climate-related events could have some impact on business continuity.  Of this group, 44% consider climate-related events would have little impact.  

Metrics and targets: still in the early stages

• Quantitative and qualitative metrics: Overall, 50% of respondents reported that they have both qualitative and quantitative approaches to measuring and monitoring climate risks.  Looking at it by sector, superannuation funds are more likely than banks or insurers to have both qualitative and quantitative measures in place (82% of funds report that they have these measures in place, vs 42% of insurers and 33% of banks.
• Assessment of emissions arising from wholesale lending (banking) and investments (insurance and superannuation): 
  • 45% of respondents overall reported they assess Scope 1 and 2 emissions.  Looking at it by sector: 71% of superannuation funds, 42% of insurers and 29% of banks report that they are doing so.  
  • Only 13% of respondents overall reported that they assess Scope 1, 2 and 3 emissions.  Looking at it by sector: 19% of banks, 12% of superannuation funds and 8% of insurers report that they do so.  

Commenting on this, APRA states that: 

'Scope 3 emissions assessments can be complex and resource intensive.  While ongoing work supporting data quality and availability will improve access to scope 3 insights over time, investing in the capabilities to measure and monitor these metrics now will position institutions as leaders in climate risk management.'

• Targets: 73% of respondents reported having one or more climate-related targets  (eg direct operational emissions targets, financed emissions targets) in place.  Looking at it by sector, 82% of superannuation funds, 77% of insurers and 62% of banks reported having targets.  Most institutions report that these targets are reviewed annually (in line with APRA's guidance), or that they have identified circumstances  (eg outcomes from internal climate change scenario analysis, scientific developments, changes in national targets/policies etc) that could trigger a review.   

Disclosure – TCFD-aligned disclosure is 'common' but there is variation in the scope/quality of disclosure provided

• APRA found that TCFD-aligned disclosure is 'common' with 90% of respondents that who have publicly disclosed their approach to measuring/managing climate related risk reporting that they have aligned their disclosure to the TCFD framework.  APRA comments that 'almost all' of the remaining 10% of institutions have indicated that they plan to align their disclosure to the TCFD framework in the next 12 months.
• APRA makes clear however that though there is

'wide-scale adoption of the TCFD framework, the scope and quality of information disclosed by APRA-regulated institutions varies.  Some institutions focus on qualitative disclosures on direct and supply-chain related operations, while others have adopted more sophisticated disclosures on quantitative financed emissions and forward-looking analysis'.

Integrating climate risk into supervision

APRA has indicated that insights from the survey will inform its supervisory activities going forward. The regulator states:

'While the responses overall indicated broad alignment with CPG 229 across the industries, there are areas for improvement at both industry and individual institution levels.  The insights from the survey responses will be integrated into supervisory activities in accordance with APRA’s risk-based supervision model. 

APRA expects institutions to evolve their climate risk management practices in response to developments in climate-related science, data, and stakeholder expectations'.  

APRA has also flagged that it will consider rolling out a second survey to enable APRA to monitor the evolution in entities' approach to management and disclosure of climate risk over time.  APRA also flags that it 'will be seeking to develop additional tools to evaluate climate-related financial risks and increasing its scrutiny of institutions' progress in address the impact of climate risk' going forward.  

[Sources: APRA media release 04/08/2022; Information paper - Climate risk self-assessment survey]

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