Climate change related risks

Whilst the impact of climate change is not restricted to any particular industry or sector, APRA has recently discussed its position on climate change related (CCR) risks for the financial sector, together with its expectations for regulated entities in addressing these risks.

APRA observes that:

“APRA’s initial focus on CCR risks was mostly in terms of an insurers’ exposure to losses from increasingly frequent and severe natural disasters, or ‘physical risks’. However, this has now expanded to recognise there can also be potential flow-on or secondary impacts associated with climate change. These include the exposure of banks’ and insurers’ balance sheets to, for example, real estate impacted by climate change, and to re-pricing (or even ‘stranding’) of carbon-intensive assets in their loan books. Asset owners and investment managers are also exposed, which is important for the superannuation sector. These CCR risks are so-called ‘transition risks’ — those stemming from changes in policy, law, markets, technology and prices as part of the agreed transition to a low-carbon economy.”

Recent discussion of energy security has also focussed on the risk of power supply continuity and increased power prices and steps needed to improve energy productivity and efficiency.

Company directors who fail to properly consider and disclose foreseeable climate-related risks to their business could be held personally liable for breaching their statutory duty of due care and diligence under the Corporations Act.

APRA encourages financial entities to consider their need to be able to model the potential impact of CCR risks under different scenarios and over different time horizons, beyond mere documentation of static metrics.

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