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Prudential guidance on climate risk finalised

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The Australian Prudential Regulation Authority (APRA) today released its final prudential practice guide on climate change, setting out how insurers and other financial services providers can manage related financial risks arising from global warming within their existing framework.

Prudential guide CPG 229 Climate Change Financial Risks is developed in response to requests from the financial services industry for greater clarity of regulatory expectations and examples of better industry practice.

APRA published the guide after wrapping up a consultation it launched in April on the draft version, which received nearly 50 submissions including from the Insurance Council of Australia (ICA), IAG and Swiss Re.

The regulator says the guide is designed to assist banks, insurers and superannuation trustees to manage the financial risks of climate change.

It says there are plans next year for a survey to gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the G20 Financial Stability Board’s Taskforce for Climate-related Financial Disclosures.

CPG 229 imposes no new regulatory requirements or obligations, but will instead aid APRA-regulated entities to address climate-related risks and opportunities within their existing risk management and governance practices.

“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,” APRA Chairman Wayne Byres said.

“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.”

Mr Byres says 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," he said. "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 guide says the changing climate creates physical, transition and liability risks, all of which carries potential implications for insurers and the wider financial services sector.

In relation to physical risk, insurers face increased claims from extreme weather events, according to the guide. It can also lead to changes to the cost and availability of insurance.

“How and when specific climate risks will materialise is uncertain, but there is a high degree of certainty that some financial risks will materialise as a result of climate change,” the guide says.

“APRA considers that prudent practice would be for an institution to evidence the management of climate risks within its written risk management policies, management information, and board risk reports.

“Where climate risks are material, this may require updating existing risk management policies and procedures.”

Click here for the guide, here for the non-confidential ICA submission, here for IAG and here for Swiss Re.