Australian banks will largely be left alone in facing the financial impacts of climate change, according to new guidance from the prudential regulator that only encourages the sector’s leadership to begin factoring its risks into corporate governance frameworks.
The Australian Prudential Regulation Authority (APRA) on Friday released new practice guidance for the banking sector in a bid to offer more clarity on how major Australian banks will be expected to navigate the market’s economic transition to net zero by 2050.
The regulator’s message to the banks was one centred more around encouraging a new “best practice” approach to climate change than it was about strong-arming them into new regulatory requirements, even as parts of the sector called on the regulator to turn the screw on greener lending.
Some of the regulator’s suggestions included limiting exposure to riskier businesses with a vested interest in or reliance on carbon — setting “exposure limits” — while conducting broader scenario analysis and being more transparent with the market on perceived climate-related financial risks.
Much of the document’s focus, though, is geared towards how Australian banks can limit risk exposure through board-member training and an overhauled approach to the way climate risks fit into corporate governance frameworks.
Boards, from Friday, will be encouraged to “re-evaluate the risks, opportunities and accountabilities arising from climate change on a periodic basis”, while also ensuring that “where climate risks are found to be material”, the institution locks in firm “risk exposure limits”.
While the guidance was vague on whether the regulator even considered climate change a “material” threat to the sector, APRA chair Wayne Byres said Australia’s transition to a lower-emissions economy will bring financial risks with it either way.
“Recent developments, including the Australian government’s commitment to net zero emissions by 2050, underscore the trajectory the world is on in response to climate change,” Byres said.
“Most APRA-regulated entities recognise the potential challenges of climate change, such as future changes in consumer and investor demand, emerging technologies, new laws or adjustment in asset values, but they don’t always have a good understanding of how to respond.”
APRA’s new climate guidance arrives in the wake of mounting pressure aimed at the regulator from across the sector, which saw it open a draft of the document to consultation in April.
Then, as it was on Friday, some industry players warned that the regulator hadn’t been prescriptive enough, allowing for loose interpretations on the risks of underwriting loans for high-risk businesses, like coal mines and other high-emitting companies.
Byres defended the guidance, which he said should only offer suggestions to entities that, ultimately, will have the final say on how they move forward.
“Recognising the diversity of APRA-regulated entities, however, the guide does not prescribe any particular way of doing things,” Byres said.
“Nor does it force companies into making any particular investment, lending or underwriting decision — those are matters for the entities themselves to decide.
“But we do want to make sure that those decisions are well-informed, and don’t undermine the interests of bank depositors, insurance policyholders or superannuation members.”
APRA suggested it had taken all reasonable steps to address some of the climate-induced concerns heard throughout the consultation process, but maintained that a principle-based approach was best to ensure the guidance is nimble enough to cover a wide range of institutions.