Australia’s financial services regulator, the Australian Prudential Regulation Authority (APRA), announced the release of its final prudential practice guide, CPG 229, aimed at assisting banks, insurers and superannuation trustees to manage the financial risks of climate change.

The objectives of the guide include helping institutions understand risks and opportunities that may arise from a changing climate, ensure that investment, lending and underwriting decisions are well-informed, and implementing proportionate governance, risk management, scenario analysis and disclosure practices. Key areas of focus include the identification and measurement of risks, including high exposure sectors, quantitative and qualitative monitoring of risks, considering scenario analysis to understand risks and opportunities, engaging with customers and counterparties to manage and mitigate risks, and reporting.

esg playbook

According to APRA, the guide focuses on enabling regulated entities to manage climate-related risks and opportunities within their existing risk management and governance practices, without imposing new regulatory requirements or obligations.

Most notably, the guide does not include mandatory climate disclosures by the regulated entities, instead stating that institutions should consider “whether additional, voluntary disclosures could be beneficial in enhancing transparency and giving confidence to the wider market in the institution’s approach to measuring and managing climate risks.”

This approach contrasts with developments in several other markets, which are increasingly turning to mandatory reporting on climate risks. The UK, for example, announced formal plans last month to introduce legislation requiring mandatory climate-related disclosure by companies and financial institutions, and the U.S.’ Securities and Exchange Commission has discussed plans to have proposed rules in place for mandatory climate risk reporting by companies by the end of the year.

The guide does note that entities should be prepared for mandatory disclosure requirements in other jurisdictions.

APRA Chair Wayne Byres said:

““Recognising the diversity of APRA-regulated entities… the guide does not prescribe any particular way of doing things. Nor does it force companies to making any particular investment, lending or underwriting decision – those are matters for the entities themselves to decide. But we do want to make sure that those decisions are well-informed, and don’t undermine the interests of bank depositors, insurance policyholders or superannuation members.”

The release of the guide follows the recent announcement by the Australian government of a commitment to reach net zero emissions by 2050, based on a plan relying heavily on technology investment and development, rather than on legislation and taxes.

Byres added:

“Recent developments, including the Australian Government’s commitment to net zero emissions by 2050, underscore the trajectory the world is on in response to climate change.

“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws or adjustments in asset values, but they don’t always have a good understanding of how to respond. CPG 229 is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice.”

Click here to view the APRA guidance paper.