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Australia’s APRA seeks stress tests for climate-linked financial risk

Australia’s APRA seeks stress tests for climate-linked financial risk

* APRA outlines plans focused on climate-related financial risks

* Climate change risk a focus to improve industry resilience

* More supervisory attention being given to understand risks

 

By Swati Pandey

 

Australia’s prudential regulator said on Monday it was looking to better understand the financial risks of climate change and would begin undertaking deeper assessments of the industry’s vulnerabilities to improve resilience.

The Australian Prudential Regulation Authority (APRA) will develop industry guidance to help provide better clarity on regulatory expectations on climate-related financial risks, board member Geoff Summerhayes said in a letter to all regulated entities.

It was also seeking to undertake so-called “climate change financial risk vulnerability assessment” starting with the country’s biggest banks.

“Looking ahead, the financial risks of climate change will continue to be a focus of APRA’s efforts to increase industry resilience, and more supervisory attention is being given to understanding these risks,” Summerhayes said. “This includes deeper supervisory assessments…”

The move comes as rhetoric around climate change gathers momentum, leading finance officials from the world’s 20 biggest economies on Sunday to reference it in their final communique.

Global financial regulators are worried frequent extreme weather events could displace entire communities leading to stranded assets and a plunge in property values which could result in crippling losses for the financial sector.

Bank of England Governor Mark Carney is expected to argue for global standards on data disclosure at the COP26 climate meeting in Scotland in November.

Under his tenure, the BoE has led the way on stress-testing insurers on climate risk and is set to expand that to banks.

CLIMATE DATA DEFICIT

APRA had conducted a climate change survey in 2018 which highlighted the need to quantify the likely impact of climate change risks as well as accurately assess and appropriately price these risks.

Global regulators are developing responses to this climate data deficit 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,” he said.

Australia recently suffered one of its worst bushfire seasons on record which destroyed thousands of homes and killed 33 people followed by flash flooding on the country’s east coast.

Climate scientists are increasingly warning such disasters could become more frequent in a warming world.

On its part, APRA is seeking to undertake the ‘vulnerability assessment’ which will be designed this year and executed in 2021, with other industries such as insurance and pension funds to follow.

It will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy.

(Editing by Lincoln Feast and Jacqueline Wong)

(c) Copyright Thomson Reuters 2020

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