APRA, Reserve Bank team up to help industry address climate change

APRA, Reserve Bank team up to help industry address climate change | Insurance Business Australia

APRA, Reserve Bank team up to help industry address climate change

With the impacts of climate change on Australia worsening year after year, the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA or Reserve Bank) have teamed up to guide financial institutions and the Australian financial system in responding to the financial risks of climate change.

In a joint statement, APRA and the RBA have warned financial institutions that climate change directly affects the economy and the financial system. Therefore, APRA vows to ensure the financial safety of individual financial institutions and promote the stability of the country's financial system. At the same time, the RBA said it would implement monetary policy to achieve price stability and maintain financial stability.

As part of its responsibility to help the industry respond to the financial risks of climate change, APRA will lead a bottom-up supervisory climate vulnerability assessment (CVA) exercise with the five largest Australian banks under its supervision by using as its basis the Network for Greening the Financial System (NGFS) scenarios that are being adapted to explore Australian-specific circumstances.

The Reserve Bank will assist APRA with the CVA by participating in the steering committee and a modelling working group. Additionally, it will:

  • Monitor the implications of climate change and related mitigation policies for the economy and the transmission of monetary policy through financial markets and the banking system to households and businesses; and
  • Continue to augment its forecasting models and a broader suite of macroeconomic models to understand the macroeconomic implications of different climate risks, including how they translate into financial stability risks.

Read more: The role of insurance in lessening the climate protection gap – Munich Re

Financial institutions have been focusing on addressing the impacts of climate change and decreasing their carbon footprint these past few years. Insurers, for example, continue to distance themselves from controversial industries such as coal, according to the Insure Our Future campaign.

In December 2020, the campaign released a report stating at least 65 insurers with combined investments of US$12 trillion have either adopted a divestment policy or committed to refuse investing in coal, up from 35 companies and US$8.9 trillion of assets in the previous year.

As part of their responsibility to guide financial institutions, APRA and the RBA will continue drawing attention to the financial stability and macroeconomic consequences of climate change, including through speeches and by publishing analytical work on climate change. They also committed to sharing knowledge based on their experience in climate-related topics with other central banks and regulatory agencies.

Domestically, they will work with other regulatory agencies through the CFR Climate Change Working Group. Internationally, they will continue to share knowledge through forums including the NGFS, the Financial Stability Board (FSB), the Bank for International Settlements (BIS), and the Executives' Meeting of East Asia Pacific Central Banks (EMEAP).