The Australian Prudential Regulation Authority (APRA) has outlined action underway to ensure insurers and the Australian financial system is ready to respond to economic risks posed by climate change.

In a joint statement with the Reserve Bank of Australia, APRA says climate change is directly affecting the financial system and therefore relates to its regulatory mandate to ensure the financial safety of insurers and promote the stability of the Australian financial system.

APRA is among more than 50 international members of the Network for Greening the Financial System (NGFS). The Network promotes the role of central banks and financial regulators in mitigating the physical, transition and liability risks of climate change in the finance sector.

“The physical impact of climate change, and the global transition to a lower emissions economy, will affect economic output, prices and employment. Climate change will be a driver of change in the value of certain assets and income streams, and therefore poses a risk to financial institutions and financial stability,” APRA says in its NGFS Pledge.

In September, APRA published a new Climate Vulnerability Assessment (CVA) paper on work underway at Australia’s largest five banks. The CVA objectives are “widely applicable, including for the superannuation and insurance sectors … in Australia,” it said.

Publication of aggregated results and findings are expected early next year and APRA says the results should help institutions proactively address risks and capitalise on new opportunities.

“The three key objectives of the CVA are to assess potential financial exposure to climate risk; to understand how banks may adjust business models and implement management actions in response to different scenarios; and to foster improvement in climate risk management capabilities,” APRA’s pledge said.

APRA will this year finalise prudential guidance to assist insurers to identify, monitor and manage the climate-related risks they are exposed to with respect to governance, risk management, scenario analysis and disclosure.