Australian superannuation trustees face climate scrutiny from regulator

Australian Prudential Regulation Authority releases climate survey

Australia’s prudential regulator has committed to ramp up its scrutiny of how the country’s A$6trn financial sector is managing climate change, as it publishes its first climate risk survey of regulated entities – including superannuation trustees, banks and insurers.

Last week, the Australian Prudential Regulation Authority (APRA) published findings of its pioneering 2018 survey Climate Change: Awareness to action, which sought to assess “industry maturity” in relation to “climate risk governance, assessment and disclosure”.

It found that despite an increasing awareness of climate risks among the 38 regulated entities polled, just a third currently view such risks as “material” to their business. Half thought it would be in the future.

The APRA is calling on those it oversees to now start to actually mitigate climate risks.

“APRA’s views on the economic risks of climate change, recently echoed by the Reserve Bank of Australia, are consistent with those of financial regulators internationally”, said Geoff Summerhayes, APRA’s Executive Board Member. “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 Australian supervisors would be “factoring” climate risks into their “ongoing supervisory activities”.

Summerhayes is also the Chair of UN Environment’s Sustainable Insurance Forum.

But the report stopped short of proposing “additional prudential standards” prescribing “minimum expectations” on the management of climate risks.

Instead the regulator will increase the “intensity of its supervisory activities” to assess the “effectiveness of risk identification, measurement and mitigation strategies adopted by APRA-regulated entities”.The report adds that the APRA expects to “observe continuous improvement in the awareness and action of regulated entities” on climate risks, including an “increased adoption of the recommendations of the Task Force on Climate-related Financial Disclosure’s (TCFD)”.

Though it also found that around half of the surveyed firms do not intend to disclose using the TCFD framework, developed under the auspices of the Financial Stability Board (FSB).

In addition to APRA’s enhanced supervisory action there will also be greater “domestic regulatory coordination” between Australia’s regulators through the work of the Council of Financial Regulators (CFR), including the development of “climate change analytical tools”.

APRA currently chairs the CFR’s Working Group on Financial Implications of Climate Change. The group, which was established in 2017, provides a forum for APRA, the Australian Securities and Investment Commission (ASIC), the Reserve Bank of Australia (RBA) and the Australian Treasury to address climate change and its implications for the Australian financial system.

Australia’s regulators were criticised in the Banking Royal Commission’s final report on the misconduct in the banking, superannuation and financial services industry. That report, which was published in February, called on them to broaden their focus beyond “financial soundness and stability” to include “non-financial risks” including “culture, governance and remuneration”.

APRA is also an observer to both the Network for Greening the Financial System and the steering committing working on Australia sustainable finance roadmap, which is expected to be named soon. Link