Australia’s APRA to stress test banks against climate change

Sydney (Reuters): Australia’s prudential regulator said this week it was looking to better understand the financial risks of climate change and would begin undertaking deeper assessments of the industry’s vulnerabilities in an effort to improve resilience.

The Australian Prudential Regulation Authority (APRA) was seeking to estimate the financial impact from climate change on the country’s largest financial institutions by conducting “vulnerability assessments”, board member Geoff Summerhayes said in a letter to all regulated entities.

The watchdog will also develop an industry guidance which will help provide better clarity on regulatory expectations in relation to climate-related financial risks.

“Looking ahead, the financial risks of climate change will continue to be a focus of APRA’s efforts to increase industry resilience, and more supervisory attention is being given to understanding these risks,” Summerhayes said “This includes deeper supervisory assessments...” The move comes as rhetoric around climate change gathers momentum, leading finance officials from the world’s 20 biggest economies on Sunday to reference it in their final communique.

Global financial regulators are worried frequent extreme weather events could displace entire communities leading to stranded assets and a plunge in property values which could ultimately result in balance sheet-crippling losses for the financial sector.

APRA’s so-called “climate change financial risk vulnerability assessment” will be designed this year and executed in 2021, starting with banks. Other industries such as insurance and pension funds would follow after.

It will involve entities estimating the potential physical impacts of a changing climate, including extreme weather events, on their balance sheet, as well as the risks that may arise from the global transition to a low-carbon economy, Summerhayes added.

“Effective action now on these fronts will promote strong understanding and management of the potential financial impacts of a changing climate on current and future business prospects, allowing well-managed entities to minimise costs and optimise benefits,” he said.