Prudential standards CPS 220 and SPS 220, both relating to risk management, will be updated to explicitly include climate risk in 2025, APRA said yesterday.
APRA yesterday published an analysis of its Climate Risk Self-Assessment Survey 2024, and broadly banks fared well.
This was APRA’s second climate risk self-assessment exercise, and much more wide-ranging than the first.
This year, to gain a broader understanding across the financial industry, APRA invited participation from Tiers 1 to 4 across banks, insurers (including general, private health and life insurers as well as reinsurers), and superannuation trustees
“The average level of climate risk maturity of large banks has improved since 2022” APRA said, but there is a wide range.
“The average climate risk maturity score for large banks was 18 per cent higher in 2024 than the comparable 2022 score, indicating a significant improvement in the banking industry’s overall climate risk maturity.”
In contrast, the average climate risk maturity scores for large insurance and superannuation entities remained largely unchanged.
“Within each industry, climate risk maturity scores spanned a wide range. Banks have the greatest range, with the lowest maturity score at 2 (out of 100) and the highest at 97 (out of 100), a range of 95 points. “When considering only large entities, the highest to lowest bank maturity scores spanned a smaller range (55 points), compared to insurance and superannuation entities.”
“As signalled in the 2024-25 Corporate Plan, APRA continues to lift its expectations for entities in considering climate-related financial risks in their decision-making.”
Building on the survey’s insights, APRA will undertake a range of activities to elevate consideration of climate risk within the regulatory and supervisory landscape, including:
• Commencing consultation in 2025 on amending prudential standards CPS 220 and SPS 220 Risk Management to include climate risk. This follows informal industry engagement that APRA has been conducting on appropriate next steps for further embedding climate risk considerations in the prudential framework.
• Continuing work to understand how APRA can best incorporate climate risk within its broader supervision framework. This includes training and improved support on climate risk for APRA’s supervisors. APRA voiced concern about some industry practices.
It is not common practice for entities to link senior leaders’ variable remuneration plans to climate-related targets, or to provide an incentive structure.
Banks covering 90 per cent of respondents have an incentive structure for at least some leaders, compared with only 30 per cent for superannuation trustees
Banking operations are nearly twice as likely as insurance and superannuation operations to be covered by a risk management framework that treats climate risk as a unique risk, and as a driver of other risks.
Large banks “showed a material improvement in maturity for metrics and targets compared to their 2022 score” APRA said.
But, over half of banks and insurers do not have quantitative metrics to monitor climate risk
Scope 1, 2 and 3 emissions in the wholesale lending portfolio are measured across 64 per cent of bank operations
The prevalence of transition plans is highly variable by industry, with over half of superannuation trustees having created a plan compared to 35 per