Insurers ‘generally aligning’ with climate risk guidance

APRA-regulated entities across the banking, insurance and superannuation sectors are generally aligning with the prudential regulator’s guidance on climate change financial risks.

However, only a small number of institutions indicated that they have fully embedded climate risk across their risk management framework.

The findings are based on the responses of 64 medium to large institutions to a voluntary self-assessment survey issued by APRA in March which sought to examine how entities were aligning to its climate risk guide (CPG 229) released late last year.

APRA’s guide covers its view of sound practice in areas including governance, risk management, scenario analysis and disclosure of climate-related financial risks.

“The guidance in CPG 229 is aimed at helping our regulated entities identify and manage these risks, as well as being alert to opportunities to strengthen their businesses,” said APRA deputy chair Helen Rowell.

“The survey findings indicate that most survey participants are taking this issue seriously. However, they also underline that this remains a relatively new and evolving area of risk management, especially with regards to setting metrics and targets.”

About 80 per cent of the institutions who responded to APRA’s survey said that their board oversees climate risk on a regular basis. The regulator said that ADIs reported a slightly lower rate of regular board-level climate risk oversight, while insurers reported a higher-than-average rate.

Meanwhile, 63 per cent of institutions indicated that they had incorporated climate risk into their strategic planning process, and half of these indicated that they had incorporated the short, medium and long-term impacts of climate risk.

APRA said that the survey responses demonstrated an “overwhelming focus” on shorter-term impacts over one to five years, particularly in the banking and insurance sectors.

Institutions in the super sector were more likely to report having incorporated long-term impacts into their strategic planning (77 per cent) versus those in the banking (33 per cent) and insurance (40 per cent) sectors.

According to 40 per cent of the institutions, climate-related events could have a material or moderate impact on their direct operations.

One or more climate-related targets were in place at 73 per cent of the institutions, but 23 per cent indicated that they had no metrics to measure and monitor climate risks.

Additionally, 68 per cent of institutions said they had publicly disclosed their approach to measuring and managing climate risks. Of these institutions, nearly 90 per cent aligned their disclosure to the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

“Climate change and the global response to it are creating financial risks for banks, insurers and superannuation trustees, whether it be the physical damage from floods or bushfires, or asset price volatility as consumer and investor demands evolve,” said Ms Rowell.

“With stakeholder expectations on climate risk only going to rise further in coming years, we urge all regulated entities — not only those involved in the survey — to consider the findings and reflect on their preparedness.”

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.