Facing the growing concerns of climate change and its potential impact on the financial sector, the Australian Prudential Regulation Authority (APRA) has announced ambitious plans to integrate climate risk into prudential standards by 2025. This decision is based on APRA’s thorough analysis of its Climate Risk Self-Assessment Survey for 2024, which indicated significant advancements in climate risk management among large banks. However, the data revealed that the insurance and superannuation sectors had made comparatively less progress. As a part of its commitment, APRA intends to amend CPS 220 and SPS 220 standards to explicitly include climate risk, aiming for a more robust and cohesive approach to managing such risks across all financial entities.
Bank Sector Shows Significant Progress
APRA’s survey showcased a marked improvement in climate risk maturity within large banks. Between 2022 and 2024, the maturity scores of these banks increased by 18%. Despite this positive trend, the survey indicated vast discrepancies within the banking sector; scores ranged from as low as 2 to as high as 97 out of 100. Notably, while some banks have made considerable strides in defining and tracking metrics and targets related to climate risk since 2022, more than half still lack quantitative metrics for monitoring. Only 64% of banks currently measure Scope 1, 2, and 3 emissions within their wholesale lending portfolios, highlighting the need for further advancements.
The journey towards a comprehensive climate risk management framework in the banking sector is ongoing. APRA’s findings showed that banking operations are nearly twice as likely to have distinct risk management frameworks for climate risk compared to insurance and superannuation entities. Some banks have established incentive structures for leaders tied to climate-related targets, pushing the agenda further within their organizations. However, this practice remains rare in the insurance and superannuation sectors, indicating a need for broader adoption of such measures to ensure sector-wide progress.
Insurance and Superannuation Sectors Lag Behind
In contrast to the progress observed in large banks, the insurance and superannuation sectors showed only minimal advancements in climate risk management. APRA’s survey pointed out that there was almost no change in maturity scores for these sectors over the observed period. This stagnation underscores the complexity and potential challenges these entities face in integrating climate risk into their operational frameworks comprehensively. The lack of progress raises concerns, given that both sectors play vital roles in managing long-term financial risks for individuals and businesses alike.
One of the core issues identified in the insurance and superannuation sectors is the lack of uniformity and consistency in applying climate risk frameworks. Unlike banks, these entities have yet to adopt distinct risk management frameworks for climate risk widely. Additionally, the survey highlighted that the majority of insurers and superannuation trustees haven’t linked their leadership’s incentives to climate-related metrics. This critical gap suggests that these sectors might require more directed regulatory guidance and robust internal policies to align their practices with APRA’s future standards effectively.
APRA’s Planned Actions and Future Expectations
Given the escalating worries about climate change and its potential effects on the financial sector, the Australian Prudential Regulation Authority (APRA) has unveiled ambitious plans to incorporate climate risk into its prudential standards by 2025. This initiative stems from APRA’s detailed review of its Climate Risk Self-Assessment Survey for 2024, which highlighted substantial improvements in climate risk management within major banks. Nonetheless, the survey also pointed out that the insurance and superannuation sectors have lagged behind in this area. To address this disparity and foster a more unified approach, APRA plans to revise the existing CPS 220 and SPS 220 standards to specifically include climate risk management. The goal is to ensure a more comprehensive and cohesive strategy for handling climate-related financial risks across all entities. By doing so, APRA aims to strengthen the resilience and preparedness of Australia’s financial institutions against the growing threat of climate change.
