Regulators, insurers & the UN move on climate risk

APRA has released for consultation its guidance on managing the financial risks of climate change (see APRA Guidance).

While the guidance does not impose any new requirements, it builds on the framework provided by the Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD) and APRA’s own analysis. The guidance proposes a series of practices under an institution’s risk management and governance frameworks, emphasising the:

• expectation that the board of APRA regulated entities need to be aware and oversee the management of climate related risks

• need for companies to develop capabilities in climate scenario analysis, conducting assessments in both the short and long term

• need for organizations to ensure investment, lending, and underwriting decisions appropriately consider climate related risks.

The guidance released has been long awaited, with the initial release expected in 2020 but delayed due to the pandemic.

This is one of several initiatives to drive adoption of climate risk management among financial firms and regulators globally, with other items of interest in April:

• the establishment of the Net-zero Insurance Alliance. Made up of seven major insurers and the UNEP, the alliance will be focused on driving the transition to net zero though their investment and insurance activities

• the release of a report by the European Insurance and Occupational Pensions Authority (EIOPA) setting out expectations on the integration of climate scenario analysis by insurers in their Own Risk and Solvency Assessment (ORSA)

• confirmation from the Reserve Bank of Australia that it will be having a discussion on the effects of climate change on the economic and financial stability in the coming months (from Minutes of the Monetary Policy Meeting, 6 April).

Investing in risk management

The increasing momentum by regulators and government on climate risk only highlights the severity and urgency of addressing climate risk. Insurers and other financial institutions need to begin the integration of climate related risks into their current risk management and governance frameworks. As APRA notes in its guidance document, this is both a risk management imperative but also a source of opportunity, saying “Investing in better risk management will also allow institutions to identify and benefit from opportunities that arise from the transition to a low-carbon economy, to ensure ongoing resilience in the transition to a net zero economy.”

APRA also anticipates that the demand for climate risk disclosure will increase over time, and that a prudent institution will continually evolve its practices.

Please contact our Climate Risk team if you wish to know more about the implications of APRA’s guidance for your organisation.