Climate risk survey points to 'room for improvement', says APRA

The prudential regulator says there is “room for improvement” in relation to climate-related financial risks, based on the findings of its survey of a group of insurers, banks and superannuation licensees.

Four out of five boards oversee climate risk on a regular basis, while just under two-thirds of institutions have incorporated climate risk into their strategic planning process, the Australian Prudential Regulation Authority (APRA) voluntary survey of 64 regulated entities found.

Almost 40% of respondents say climate-related events could have a material or moderate impact on their direct operations; nearly three-quarters say they had one or more climate-related targets in place; and more than two-thirds of institutions have publicly disclosed their approach to measuring and managing climate risks.

Insurers made up 41% of survey participants, with general insurers accounting for half of all insurer responses. The rest came from life and private health insurers.

APRA says the overall findings suggest regulated entities are generally aligning well to the regulator’s expectations as set out in Prudential Practice Guide CPG 229 Climate Change Financial Risks. CPG 229 provides guidance on managing the financial risks and opportunities that may arise from a changing climate.

However, there is “room for improvement” as climate change financial risk remains an emerging discipline compared to other traditional risk areas, the regulator says. Climate risk falls into three categories – physical, transition and liability.

“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,” Deputy Chair Helen Rowell said.

“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.”

Survey findings by industry type show 62% of insurers are concerned about liability risk, a rapidly evolving area that can stem from the potential for ligation where institutions and boards do not adequately consider or respond to the impacts of climate change, having implications for businesses and director’s duties.

About 77% of insurers have one or more climate-related targets in place, which APRA says can be a “powerful” tool to articulate the outcomes that an institution wants to achieve, over a defined time-horizon.

Click here for more from the survey results.