APRA Survey Highlights Financial Sector’s Climate Risk Management Gaps & Gains

The Australian Prudential Regulation Authority (APRA) has released findings from its second climate risk self-assessment survey, offering insights into how financial institutions are addressing climate-related risks. The survey, aimed at all APRA-regulated banks, insurers, and superannuation trustees, drew responses from over half of the invited entities. It builds upon a smaller 2022 assessment that initially focused on large entities, marking a broadening effort to gauge sector-wide climate resilience.

APRA’s findings suggest that while many large entities have advanced in their climate risk management capabilities, disparities in maturity levels persist across the sector, with smaller institutions lagging behind in climate risk preparedness. APRA Member Suzanne Smith underscored the urgency of managing these risks, highlighting the potential for climate change to intensify vulnerabilities, such as infrastructure resilience and land use challenges, which in turn heighten risks for financial institutions.

“Climate change not only has wide-ranging impact on our planet but can also exacerbate existing vulnerabilities in Australian communities,” Smith said, “contributing to increased risk in the financial system that can reduce institutions’ ability to effectively provide key financial services.”

The survey revealed several noteworthy trends:

• Improved Maturity Among Larger Entities: Many large institutions reported improved climate risk maturity since 2022. However, around a quarter of these entities saw their scores decline, indicating uneven progress.
• Sector Variations: Banks have shown the most significant maturity improvements, whereas levels among insurers and superannuation trustees have remained largely unchanged.
• Strengths in Governance and Strategy: The survey highlights that many entities excel in governance and strategy. Conversely, climate risk management remains weaker in areas like disclosure and metrics and targets.
• Emerging Practices: Some entities are beginning to consider nature-related risks and transition planning alongside their climate risk strategies, signaling a shift towards more integrated risk management frameworks.

The findings align with APRA’s expectations, yet they emphasize a need for greater convergence towards industry-leading practices, especially among smaller institutions. APRA called on all financial institutions, regardless of survey participation, to assess their preparedness and adopt best practices in managing climate risks.

APRA’s 2025 Climate Agenda

In its 2024-25 Corporate Plan, APRA has committed to strengthening climate risk regulation and supervision. As part of this strategy, APRA plans to consult on amendments to Prudential Standards CPS 220 and SPS 220, aiming to embed climate considerations more explicitly in the financial sector’s risk management frameworks by 2025.

Smith noted the increasing expectations from stakeholders and the regulator’s push for a strategic, risk-based approach to climate-related risks. “APRA is urging all regulated entities to reflect on their own preparedness and implement leading practice for managing climate risk,” she said, signaling that APRA will maintain a keen focus on climate resilience in its oversight role.

As Australia’s financial sector confronts the challenges posed by climate change, APRA’s findings highlight both the progress made and the significant work still required to secure climate resilience across all institutions.

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