The Australian Prudential Regulation Authority (APRA) intends to increase its scrutiny of the way re/insurers manage the financial risks of climate change on their business.
The regulator called on re/insurers, as well as banks and superannuation trustees, to move from gaining awareness of the financial risks to taking action to mitigate them.
The move comes after an APRA survey found that a substantial majority of regulated entities were taking steps to increase their understanding of climate risks, including all 38 of the large banks, re/insurers and superannuation trustees that were questioned.
A third of the survey respondents also believed that climate change was a material financial risk to their businesses now, while a further half though it would be in the future.
A majority of banks considered climate-related financial risks as part of their risk management frameworks, and reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.
Additionally, respondents outlined the strategic opportunities they had identified from the transition to a low carbon economy, such as developing innovative products and services, and meeting the growing demand for green investment opportunities.
“The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers,” said APRA Executive Board Member Geoff Summerhayes. “Companies that fail to respond to these forces risk being left behind.”
“Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over coming years,” he continued.
“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.”
“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,” explained Summerhayes, who is also Chair of UN Environment’s Sustainable Insurance Forum.
“These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing.”
