In April 2021, the Australian Prudential Regulation Authority (APRA) issued new draft climate risk guidelines, the second phase in its effort to help the insurance industry and financial sector navigate the challenges posed by climate change and extreme weather.
In commenting on the ongoing challenges associated with the global COVID-19 pandemic, APRA Chair Wayne Byres said that it would be a “cruel irony for a financial institution to come through the deepest economic crisis in a century only to be caught unprepared for risks they had ample warning about and should have seen coming.” Climate change is not only still a topical news headline, but a growing focus of the international economic agenda.
In the US, the Biden Administration has just doubled its funding to help communities prepare for extreme weather events while the G7, IEA and United Nations have all declared a renewed focus on climate change. With international attention mounting and new policies emerging every few months, staying on top of the key issues surrounding climate change is now an organisational imperative.
Here are Climate Valuation’s five takeaways from the new APRA draft climate risk guidelines:
- The biggest climate risk is not preparing for climate change. Climate change has had a marked effect on the frequency and severity of extreme weather events and the costs to businesses are mounting every year. Developing a level of understanding of climate risk within your organisation and establishing a means to monitor this risk is now an urgent priority. There are a number of solutions available to support organisations in assessing climate risk but the first step is to prioritise the issue high on your company’s governance agenda.
- Failing to manage climate change risk may carry financial and legal repercussions. APRA has stated clearly that those who fail to account for climate risk are likely to face lawsuits and could lose business, saying banks and investors will be well within their rights to withdraw funding from climate-change exposed clients and industries. Many organisations are now carrying out third party climate risk analysis as part of their due diligence processes. If you are not carrying out your own climate risk analysis, there’s a good chance your competitors know more about your risk than you do.
- One-off climate risk reporting is no longer adequate. APRA’s new draft guidelines make it clear that one-off climate risk reporting will no longer be considered sufficient to understanding and managing the risks associated with climate change. Rather, companies will be required to demonstrate ongoing and dynamic oversight on their portfolio’s climate risk as it changes over time. This represents a shift away from old approaches that tended to silo climate risk forecasting within company sustainability teams, towards agile solutions that integrate climate risk into the wider organisational risk framework.
- It’s time to move beyond climate reporting and disclosure to mitigation and managing risk. From building assets and employees to supply chains and customers, it’s time for companies to think ahead. APRA has signalled that it will soon be requesting companies provide evidence of plans to manage climate risk, including how a company is engaging with customers and counter-parties. This could include providing financial assistance to help customers adapt to climate change as well as implementing policies to limit future exposure to/reliance upon high risk industries and sectors.
- Bring in the climate risk expertise you need. The complexity of climate change risk management and forward-thinking scenario planning requires specialist knowledge – a skillset that is not often found in-house. There are now a half a dozen detailed reporting frameworks available, including the now-commonly used Task Force on Climate-Related Financial Disclosures, or TCFD, but finding a third party solution that meets your organisation’s specific needs and integrates with existing internal systems can save a great deal of time and money.
With the release of these draft guidelines, APRA has sent a clear message climate change could results in serious legal and financial repercussions for those who continue to ignore it. From supply chain disruption to portfolio depreciation, preparing for climate change risks and will ensure your business is prepared for a climate resilient future.
Having worked with large banks, insurers, municipalities and investors over the last 10 years, Climate Valuation have been involved in the development of industry leading climate risk management solutions. The new APRA draft guidelines provide further clarity around the application of these and other solutions and will help companies establish the systems needed to appropriately manage the risks and opportunities over time.
Climate Valuation was established in 2016 to help homeowners and homebuyers quantify and manage the physical and financial risks of climate change to their residential property assets. Our analysis harnesses the world’s most powerful Climate Risk Engine software, leveraging the most advanced extreme weather and climate change science used by governments, utilities and financial corporations.
