The Australian Prudential Regulation Authority (APRA) has published a letter to all APRA-regulated institutions outlining plans to develop a prudential practice guide focused on climate-related financial risks, as well as a climate change vulnerability assessment.

APRA has determined that climate change risks should continue to be managed in line with the minimum requirements set by Prudential Standard CPS 220 Risk Management (CPS 220) and Prudential Standard SPS 220 Risk Management (SPS 220).

The letter outlines APRA’s intention to update superannuation Prudential Practice Guide SPG 530 Investment Governance, which includes paragraphs related to environmental, social and governance (ESG) investments and to develop and consult on a climate change financial risk prudential practice guide (PPG).

A cross-industry PPG, relevant to all entities, will set out APRA’s views on better practice and outline prudent practices in this area. The PPG will cover areas relevant to the prudent management of climate change financial risks, including aspects of governance, strategy, risk management, metrics and disclosure.

APRA’s 2018 climate change survey highlighted that many large entities understand the financial risks and opportunities from a changing climate, and described the efforts taken by some entities to embed climate change considerations into risk management frameworks.

I expect that Australia’s 2019-2020 catastrophic bushfire season together with increasingly extreme heatwaves, droughts and heavy rain events will have increased the risk rating of climate change.

Australian directors and boards need to respond to climate change risks in order to satisfy their duty of due care and diligence under section 180 of the Corporations Act 2001.

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