APRA takes on climate risk

Thursday 7th May 2020 Rachel Alembakis

The Australian Prudential Regulation Authority (APRA) is seeking to fill the newly created role of head of climate risk.

The head of climate risk will “form and lead a team responsible for providing expert advice in the area of climate risk,” and “play a lead role in ensuring regulated entities manage the financial risks of a changing climate,” according to a job advertisement placed online.

APRA’s focus on the financial risks of climate change has steadily increased in recent years. In 2017, Geoff Summerhayes, APRA executive board member, emphasised that “[s]ome climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention,” and said that APRA-regulated entities should conduct stress testing for “organisational and systemic resilience in the face of adverse shocks” from climate risk.

The regulator has continued to stress the message over the last three years. In February, APRA released a letter to all APRA-regulated entities entitled “Understanding and managing the financial risks of climate change”, in which APRA outlined that they would develop on a climate change financial risk prudential practice guide (PPG) to assist entities in complying with existing prudential requirements.

“The guidance will be informed by APRA’s engagement with other regulators domestically and internationally, as well as its ongoing engagement with industry participants,” APRA noted, and said at the time that the guide would be put out mid-2020 and seek to publish final guidance before the end of the year.

In the February letter, APRA cited its 2018 climate change survey which, “highlighted the need to address the climate data deficit, to quantify the likely impact of the physical, transitional and liability risks of climate change and accurately assess and appropriately price these risks.” APRA recommends that the data needs to be derived through scenario analysis, stress testing and disclosure of market-useful information.

“Effective action now on these fronts will promote strong understanding and management of the potential financial impacts of a changing climate on current and future business prospects, allowing well-managed entities to minimise costs and optimise benefits,” APRA said in the February letter.

APRA is not prescriptive of the reporting frameworks that regulated entities should use, but rather encourages the adoption of voluntary frameworks such as the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

An APRA spokesperson confirmed the recruitment process was happening but declined to comment further.

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