Climate change risks, sometimes dubbed “green swan” events, must be thoroughly understood to protect the health of financial systems, Australia’s corporate regulator says.

Australian Prudential Regulation Authority (APRA Chairman Wayne Byres says there are dangers in portraying negative events as incredibly rare.

He says the occurrence of so-called black swan events are "well beyond the frequency suggested by the tail of a statistically convenient normal distribution”.

APRA plans to release a prudential practice guide on managing climate-related financial risks, and undertake a vulnerability assessment designed to “avoid being caught off-guard on this front”.

“We most definitely see a thorough understanding of climate-related risks as essential for a resilient financial system,” Mr Byres said in a speech to the Risk Management Association.

“It is impossible for these events, and the changing government policies, investor preferences and community expectations that accompany them, not to have financial consequences.”

Mr Byres says 2020 was a year in which risk managers proved their worth in the face of once-in-a-century bushfires and the pandemic, and the most serious economic downturn since the Great Depression.

“From a Black Summer to a black swan, it’s been a very testing year,” he said.

The emphasis of international regulatory reforms was moving from strengthening the global financial system to how to improve its resilience as regulators realise it is “possible to be strong, but not resilient”.

Mr Byres gives the example of a car windscreen, a strong piece of glass that is rendered unfit by any small crack.

“We want a system that is able to absorb shocks, even from so-called ‘black swan’ events, and have the means to restore itself to full health,” Mr Byres says.