In 2018, Australian Prudential Regulation Authority (APRA) undertook a survey of entities in the banking, insurance and superannuation sectors.  The survey was designed to assist APRA in assessing how well entities are responding to climate change risks. As regulator of those sectors, APRA has a responsibility to promote awareness and understanding of the financial risks associated with climate change.

According to APRA, financial risks associated with climate change include:

• Physical risks. Direct damage can occur to property as a result of rising global temperatures. Extreme weather events, for example, may cause supply chain disruption, resulting in lower productivity and lower asset values.
• Transition risks. These arise from the transition to a low-carbon economy, and include risks related to regulatory policy, technological innovation, renewable power and energy advancements, and social adaptation.
• Liability risks. There may be potential for litigation if entities do not adequately consider or respond to the impacts of climate change, and may include the potential breaching of directors’ duties.

Some selected findings from the survey include:

• Banks tended to rank transition and liability risks more highly than physical risks.
• General insurers’ key risks tended to be physical, with most insurers rating flood in their top two risks.
• Life insurers focused on heat stress, regulatory and flood risks.
• Superannuation funds tended to focus on liability and transition risks, especially reputational, board liability and stranded assets.

APRA found that most of the entities surveyed were taking steps to increase their understanding of climate risk. Such risks are being integrated into risk management frameworks, and more entities are implementing financial analysis of scenarios resulting from climate change.

APRA made reference to the G20’s Financial Stability Board, which established a Task Force on Climate-related Financial Disclosures (TCFD) framework. The TCFD released a Status Report in September 2018. It noted that companies that invest in activities susceptible to climate-related risks may be less resilient to the transition to a low-carbon economy and their investors may experience lower returns.

Conversely, companies that are appropriately prepared for this transition may have a competitive advantage over others. Investors therefore need to be aware of companies’ longer-term strategies for the transition to a low-carbon economy, and therefore require adequate disclosure of information. The status report found that most companies reviewed disclosed some climate-related information, though few disclosed the financial impact of climate change on the company or the company’s resilience strategies under different climate-related scenarios.

APRA therefore not only expects entities to incorporate climate change risk management into its risk framework; they expect that entities will improve their disclosure of their actions addressing those risks. This is so that customers and investors and other stakeholders can make informed decisions on the entity’s handling of risks associated with climate change.

In the future, APRA intends to enhance its supervision activities, and the assessment of climate change risks will be embedded in its supervision activities. They will also increase the intensity of its supervisory activities to assess the effectiveness of risk identification, measurement and mitigation strategies adopted by APRA-regulated entities.

1. Incorporating financial considerations of climate change into strategy, whether it be the risks resulting from climate change or opportunities arising from it, is now expected by the regulator and will be closely monitored.
2. APRA believes that, while the implications of changing climate risks can be uncertain, this does not justify inaction. There is a high degree of certainty that financial risks will materialise, and entities can mitigate the impacts of these risks through action in the short term.
3. APRA’s survey showed that many entities have moved from an initial phase of establishing a governance structure to strategically considering climate risks. Such entities considered the risks posed to the business model, while also assessing the business opportunities.
4. Survey respondents identified strategic initiatives that they had implemented, including the development of climate change action plans and roadmaps that outline the strategy, targets and steps for managing climate change-related risks.
5. Most entities indicated that they had taken steps to improve their understanding of the risks, and there was little uncertainty of whether the risks were material to entities’ operations.
6. The governance of climate risks was shown to incorporate a range of approaches. Many respondents identified the board as having ultimate responsibility for the integration of climate change risks into governance frameworks and decision-making processes.
7. Entities are disclosing a variety of risks in many different formats. This fragmented and generalised disclosure can be challenging for consumers, investors and other stakeholders to utilise. APRA expects that in the future there should be disclosure that is specific, comprehensive and considers climate change risks distinctly.
8. Entities are influenced by a number of parties when considering climate change risks. They include investors, customers, the community and regulators. Some respondents are seeking input from external parties, including academia, consulting firms and experts such as the Bureau of Meteorology to better understand the risks.
9. Many entities believe that they can achieve a competitive advantage through their preparation for the transition to a low-carbon economy. Opportunities include demonstrating industry leadership in relation to climate change responses; developing products; and supporting the community in developing resilience and providing education.
10. APRA expects to see 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 Task Force on Climate-related Financial Disclosures (TCFD) framework.