The Australian Prudential Regulation Authority (APRA) has published an information paper outlining the purpose, design and scope of the Climate Vulnerability Assessment (CVA) which will form a core plank of APRA’s efforts to help its regulated entities understand and manage the financial risks associated with climate change.
Australia’s five largest banks, ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac, were participating in the CVA and were due to submit their first CVA analysis towards the end of this year.
Publication of aggregated results and findings would be expected early next year.
According to APRA chair Wayne Byres, the results should help the boards and management of participating institutions understand and proactively address any identified risks, as well as capitalise on new opportunities.
At the same time, they would be expected to help regulators with a better picture of the nature of the risks, and how financial institutions plan to respond.
The CVA would use two future climate scenarios published by the international Network for Greening the Financial System, which were tailored to Australian conditions:
- A scenario exploring higher transition risks due to delayed or divergent emissions reduction pathways across countries and sectors; and
- A scenario that assumes limited further action on climate change globally, with efforts insufficient to avoid significant global warming, resulting in more severe physical risks.
The information paper also compared and contrasted the CVA with similar assessments that other central banks and regulators, including the European Central Bank, the Bank of England and Banque de France, were undertaking in their jurisdictions.
“Climate change is a global challenge and is driving major policy responses and investment decisions around the world. These will have consequences for Australian companies, presenting both risks and opportunities,” Byres said.
“Understanding how, where and over what timeframe these risks will play out is a test for financial regulators, as much as it is for institutions. In response, APRA will continue its collaboration with international peers to gain insights we can use to refine and strengthen our understanding, and ensure Australian financial institutions are appropriately managing those risks.”