APRA finalises guidance on managing climate-related financial risks

APRA finalises guidance on managing climate-related financial risks | Insurance Business Australia

APRA finalises guidance on managing climate-related financial risks

The Australian Prudential Regulation Authority (APRA) has finalised its prudential guidance on managing the financial risks of climate change, following a consultation released in April 2021.

The Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229) outlines APRA's views of correct practice in governance, risk management, scenario analysis, and disclosure of climate-related financial risks.

Rather than imposing new regulatory requirements or obligations, the guide will only assist APRA-regulated entities such as banks, insurers, and superannuation trustees in managing climate-related risks and opportunities within their existing risk management and governance practices. It also aims to become flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base, and business strategy.

APRA Chair Wayne Byres said transitioning to a lower-emissions economy resulted in financial risks that businesses needed to be prepared for.

“Recent developments, including the Australian Government's commitment to net-zero emissions by 2050, underscore the trajectory the world is on in response to climate change,” Byres said.

“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws, or adjustments in asset values, but they don't always have a good understanding of how to respond. CPG 229 is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice.

Aside from refusing to impose new regulatory requirements, the guide refuses to force companies to make any particular investment, lending, or underwriting decision.

“Those are matters for the entities themselves to decide. But we do want to make sure that those decisions are well-informed and don't undermine the interests of bank depositors, insurance policyholders, or superannuation members,” Byres said.

APRA encourages regulated entities to use the finalised guidance immediately to enhance their management of climate change-related financial risks in a way that is appropriate to their business and particular circumstances.

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This month, APRA also released the finalised requirements and accompanying guidance related to Prudential Standard SPS 250 Insurance in Superannuation (SPS 250), following two years of extensive industry consultation.

The finalised SPS 250 and the Prudential Practice Guide SPG 250 Insurance in Superannuation (SPG 250) aim to ensure better member outcomes through updated requirements for trustees to select, manage, and monitor members' insurance arrangements.

The prudential regulator announced that the enhancements to SPS 250 will commence on July 01, 2022 – with copies of the response paper, SPS 250, SPG 250, and public submissions available on the APRA website.

APRA encourages trustees to reassess their insurance arrangements and strategy, risk, and compliance frameworks in preparation for this date.