Banks will soon be adding a new criteria when assessing how much they will lend—climate change risk. The Australian Prudential Regulation Authority is set to lean on lenders to include climate risk when making financial decisions, which of course will include lending.
APRA’s Four-Year Plan and Climate Risk Assessment
The move is included in APRA’s new four-year corporate plan to strengthen the stability of our financial institutions. The regulator wants to make it clear that financial institutions are being exposed to risk due to the increased frequency and severity of climate events and it’s impacting the value of assets.
Global Focus on Nature-Related Financial Risks
“There’s a heightened global focus on the impact of nature-related risks, such as the loss of biodiversity on the financial system and the community,” APRA’s plan says. In response, APRA plans to incrementally lift expectations for banks and lenders to consider climate risks when making decisions, something they say will align them with global best practice.
New Prudential Framework and Stress Testing for Financial Stability
On the ground, it will materialise by climate risk being included in APRA’s prudential framework through amendments. The corporate plan also introduces the idea for APRA to develop a stress test in a bid to understand how the financial system is interconnected. The hope here is to gain a deeper understanding of how ripple effects work and unexpected shocks to financial stability.
Focus on Resilience Amid Geopolitical and Economic Uncertainty
APRA chair John Lonsdale said the plan hopes to build on the financial and operational resilience of APRA-regulated entities and at the same time it responds to emerging and heightened risks. “At a time of considerable geopolitical volatility and with an uncertain economic outlook, it’s vital that banks, insurers and superannuation trustees are prepared for whatever potential challenges could arise,” he said in The Adviser.
“Over the coming four years, APRA will step up its focus on operational and cyber-resilience to ensure our regulated entities are equipped to maintain critical financial services in a world that is becoming more interconnected and dependent on digital technologies.
“We will delve more deeply into that interconnection by examining the links between banking and superannuation and the possible contagion risks that arise from that relationship. In supervision, we will retain a close watch on risk culture and risk management, with climate change and crisis preparedness to be areas of particular focus over the next year.”
