The financial sector’s response to climate-related risks is increasingly under scrutiny, as highlighted by the recent results of a climate risk self-assessment survey conducted by the Australian Prudential Regulation Authority (APRA).
The survey aimed at evaluating how well banks, insurers, and superannuation trustees are integrating climate change considerations into their risk management and financial strategies, aligning with the Prudential Practice Guide CPG 229 on Climate Change Financial Risks. This voluntary survey was built on an earlier 2022 initiative but widened its scope to include all APRA-regulated entities, receiving participation from over half of these institutions.
Findings suggest a general alignment with APRA’s expectations, but significant variations in climate risk maturity still exist, especially among smaller entities. Most large entities have reported improvements in their climate risk maturity since 2022. However, about one-quarter have seen a decline, mainly due to a decrease in self-assessed disclosure maturity.
Meanwhile, the maturity levels in the insurance and superannuation sectors remain broadly unchanged. Within the insurance industry, notable differences in climate risk maturity were observed among the general, life, and private health insurance cohorts.
Key strengths across most industries included areas of governance and strategy, as well as risk management. However, a slight decline in climate risk disclosure was noted in 2024, despite it being the most advanced area in 2022. This trend may indicate a recalibration of expectations around what constitutes mature disclosure practices rather than an actual deterioration in those practices.
"Climate change not only has wide-ranging impact on our planet but can also exacerbate existing vulnerabilities in Australian communities, such as poor land use planning or a lack of infrastructure resilience. This contributes to increased risk in the financial system, that can reduce financial institutions’ ability to effectively provide key financial services,” APRA member Suzanne Smith said.
Entities with more mature governance structures have typically integrated climate risk more thoroughly into their risk management frameworks. In addition, these entities are beginning to consider adjacent risks and practices, such as nature risk and transition plans, showing a deeper and more holistic approach to environmental challenges.
As part of its ongoing efforts to prioritize climate issues, APRA highlighted in its 2024-25 Corporate Plan that it will increase expectations for regulated entities to incorporate climate considerations into their decision-making processes.
This includes plans to amend Prudential Standards CPS 220 and SPS 220 Risk Management to integrate climate risk by 2025, marking a significant push toward more robust climate risk governance in the financial sector.
“Stakeholder expectations are rising, and APRA is committed to ensuring that the institutions it regulates take a strategic and risk-based approach to managing climate-related risks in a proportionate manner,” Smith said.
