Introduction

The Australian Prudential Regulation Authority (APRA) has said it intends to 'increase its scrutiny of how banks, insurers and superannuation trustees are managing the financial risks of climate change' following the release of its first climate risk survey.  An overview of some of the key findings of the survey and APRA's expectations of entities going forward is below.

APRA's Climate Risk Survey

The Australian Prudential Regulation Authority (APRA) surveyed 38 large banks, insurers and superannuation trustees to assess their views and practices related to climate-related financial risks. The survey found a 'substantial majority' of regulated entities are taking steps to increase their understanding of the threat, including all of the banks, general insurers and superannuation trustees surveyed.

Some Key Findings

A good level of risk awareness was observed

Most entities indicated that they had taken steps to improve their understanding of the risks (100% of superannuation trustees, ADIs, and General Insurers, 60% of private health insurers and 40% of life insurers).  APRA also observed that there was little uncertainty of whether the risks were material to entities’ operations.  

Range of approaches to climate risk observed

• APRA observed a range of approaches to the governance of climate risk, though many respondents identified the board as having ultimate responsibility for the risks.   
• Many of the respondents noted that they had embedded climate-related financial risks into their enterprise risk management frameworks.  APRA observed that life insurers surveyed appeared to have a less developed response to climate risk compared to other entities.
• Survey respondents identified a number of strategic initiatives that they had implemented, including the development of climate change action plans, climate change position statements and roadmaps that outline the strategy, targets and steps to take to reach their objectives for managing climate change-related risks.
• The survey responses indicated that entities are considering climate change risks over multiple time periods, on short, medium and long-term horizons. However, there were some entities that were focused on either short-term or long-term horizons only.  APRA observed that 'these narrower perspectives may pose risks to those entities or leave the entities vulnerable to missed opportunities'.

Approach by sector

• Authorised Deposit Taking Institutions (ADIs): The majority of the ADIs surveyed included climate-related financial risks as part of their risk management framework, with the board having ultimate responsibility. The risk management framework was observed to cascade down to board sub-committee and management levels. The largest banks were also observed to be the most advanced in their approach.
• General insurers that identified climate change risks to be material to their business generally had similar oversight as ADIs in place. A number of the foreign-owned general insurers were observed to be guided by their parent’s approach.
• Registrable Superannuation Entity (RSE) licensees generally indicated that investment teams are responsible for the day-to-day assessment and management of climate change financial risks. The RSE licensees surveyed had sufficient resources to implement better practices such as a dedicated environmental, social, governance (ESG) team or ESG manager with this responsibility. Many RSE licensees indicated that oversight sits with the board, with some delegation of responsibilities to sub-committees. 
• Private health insurers generally identified board and executive responsibilities in relation to key risks, highlighting corporate social responsibilities and sustainability rather than specific climate-related financial risks.
• Life insurers generally identified no specific employee responsible for climate-related financial risks, although many acknowledged the role of the CEO and emerging risk teams in managing any emerging risks.

Top climate related financial risks identified

Overall, entities identified the following as the top climate related financial risks: 1) reputational damage, 2) flooding, 3) regulatory changes and 4) cyclones were nominated as the top climate-related financial risks. 

Top climate related financial risks by sector

• Four of the seven ADIs surveyed ranked energy risk as their highest climate-related financial risk. One ADI ranked sea level rises as its highest risk. More broadly, most ADIs ranked transition and liability risks higher than physical risks.
• General insurers’ key risks related to physical risks, with the majority of the general insurers rating flood among their top two risks.
• Three of the five life insurers rated heat stress as their key risk. Regulatory and flood risks were also rated highly as key risks by the life insurers surveyed.
• Three of the five private health insurers rated reputational risk as their major risk, followed by regulatory risk.
• RSE licensees’ key risks were focused on liability and transition risks rather than physical risks. Reputational, regulatory, board liability and stranded assets were cited as top risks by different RSE licensees. 

Disclosure

With respect to disclosure, APRA observed that the extent to which survey respondents are disclosing climate-related financial risks 'was mixed'. 
Many respondents disclose climate-related financial risks to external stakeholders in multiple reports, including the annual financial report, sustainability reports and investor presentations. Other forms of disclosure include global reporting requirements, external publications, website and other communications to customers. 
Disclosures were observed to be much more prevalent among ADIs and RSE licensees, with around 70% making climate disclosures.

Why not disclose under the TCFD framework? Respondents that had no plans to disclose utilising the TCFD framework, gave the following reasons: a) a lack of opportunity to assess whether the recommendations are appropriate to the organisation; b) assessments that the recommendations are not applicable to their business; c) assessments that other disclosures adequately cover this area; d) resource constraints and data availability; and e) the risk not being viewed as being material.

APRA's expectations

• Uncertainty is not an excuse for inaction: APRA Executive Board Member, Geoff Summerhayes, said 'APRA’s views on the economic risks of climate change, recently echoed by the Reserve Bank of Australia, are consistent with those of financial regulators internationally. These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing'.

[Note: Mr Summerhayes appears to be referring to the views expressed by Deputy Governor of the Reserve Bank of Australia, Dr Guy Debelle in a recent speech on Climate Change and the economy.  MinterEllison's Sarah Barker has recently written an article proiding insights into the significance and likely impact of Dr Debelle's statement in the broader context of climate risk reporting see: New developments impact climate change related risks 14/03/2019]

• Climate risks should be assessed within the existing legal framework: Mr Summerhayes added that gaining an understanding of the risks is an important first step for entities, but that the regulator wants to see continuous improvement in how organisations disclose and manage these climate 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' he said.
• There is a need for improved disclosure: APRA found that entities are beginning to disclose a variety of risks in many different formats and the regulator comments that this 'fragmented and generalised disclosure can be challenging for consumers, investors and other stakeholders to utilise'.  APRA observes that the need for accurate and timely disclosure has been well-defined in a memorandum of opinion titled Climate Change and Directors’ Duties (the Hutley opinion) and that it expects that disclosure that is 'specific, comprehensive and considers climate change risks distinctly will progress in the future. APRA notes that the TCFD recommendations provide an established, voluntary framework for this disclosure'.
• Continuous improvement is expected: APRA also said it expects to 'observe a continuous improvement in the sophistication of entities' management of climate change risks and preparations for the transition to a low-carbon economy, including the adoption of the recommendations of the TCFD [the Task Force on Climate-related Financial Disclosures (TCFD) framework]'.

[Note: The recently revised fourth edition of the ASX Corporate Governance Principles and Recommendations also encourages listed companies to consider reporting under the Financial Stability Board's Task Force on Climate- related Financial Disclosures (TCFD) recommendations.  See: Governance News 04/03/2019.]

[Source: APRA media release 20/03/2019; APRA information paper — Climate Change: Awareness to Action 20/03/2019; [registration required] The AFR 20/03/2019]