The Australian Prudential Regulation Authority (APRA) is set to increase its scrutiny of how insurance companies are managing the financial risks of climate change to their business.
The APRA has called on re/insurers, alongside banks and superannuation trustees, to move from gaining awareness of the financial risks to taking action to mitigate them. The decision follows the release of an APRA survey, which found that a substantial majority of regulated entities were taking steps to increase their understanding of climate risks, including all 38 of the large banks, general insurers and superannuation trustees surveyed
The survey suggests a third of the survey respondents believed that climate change was a material financial risk to their businesses now, while a further half thought it would be in the future. Additionally, the majority of banks said they consider climate-related financial risks part of their risk management frameworks, while reputational damage, flooding, regulatory changes and cyclones were nominated as the top climate-related financial risks.
Furthermore, respondents outlined the strategic opportunities they identified from the transition to a low carbon economy, such as developing innovative products and services, and meeting the growing demand for green investment opportunities.
“The world is rapidly transitioning to a low carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers,” APRA executive board member Geoff Summerhayes said. “Companies that fail to respond to these forces risk being left behind.”
“Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks over the coming years.
“APRA expects that climate risks be assessed within existing prudential risk management standards CPS 220 and SPS 220, and supervisors will be factoring this into their ongoing supervisory activities.
Summerhayes noted APRA’s views on the economic risks of climate change are consistent with those of financial regulators internationally.
“These risks are material, foreseeable and actionable now. Uncertainty over long-term impacts or policy direction is not an excuse for doing nothing,” he added.
