Additional Authors: Kristyn Glanville and Lauryn Petropoulos
Businesses are busy focusing on, reviewing and implementing their business continuity plans ('BCPs') and no doubt also considering short and long term changes that will be required to their activities and operations. Climate change risks and legal liabilities should form part of this review given the proposed actions outlined by the Australian Prudential Regulation Authority (APRA).
On 24 February 2020 APRA announced to APRA-regulated entities that they will be developing a climate change prudential practice guide ('Guide'). There will be consultation on the draft Guide mid-2020 and, subject to feedback, APRA says that they will seek to publish the final guidance before the end of the year. This follows the APRA 2018 climate change survey which indicated that entities are moving from awareness of climate change risks to action, with entities also beginning to disclose a variety of risks in different formats. APRA notes that the fragmented and generalised disclosure can be difficult to employ for consumers, investors and other stakeholders.
Who will the Guide apply to?
APRA envisions that the Guide will be cross-industry and relevant to all entities who are required to comply with existing prudential requirements on climate-related financial risks (including those found in the Prudential Standard CPS 220 Risk Management). Covering aspects of governance, strategy, risk management, metrics and disclosure, the Guide seeks to provide greater clarity on regulatory expectations of climate change financial risks. APRA states that this Guide does not seek to establish new obligations on entities and assured that the Guide will be aligned with recommendations of the Financial Stability Board's Task Force of Climate-Related Financial Disclosures ('TCFD'). The TCFD, established by the G20 Financial Stability Board in 2016, is a voluntary framework for climate-related financial disclosures and is applicable to all industry sectors and jurisdictions.
What will be involved in the climate change financial risk vulnerability assessments?
Data collected from the APRA 2018 climate change survey indicated that many large entities understand the financial risks and opportunities associated with a changing climate and have described their efforts in embedding these risks to their management frameworks. APRA acknowledges a climate data deficit in regulatory guidance and a need to 'quantify the likely impact of the physical, transitional and liability risks of climate change and accurately assess and appropriately price these risks'. Greater regulatory guidance may provide some benefits to industry, so that companies can disclose consistently with their competitors. However, for those less progressed in the TFCD process, this may force them to engage with risks sooner, or in more detail, than they had anticipated.
APRA seeks to consult international stakeholders to ensure that their approach is consistent with practices being established and used by peer regulatory authorities overseas. To improve understanding of these risks on a domestic level, APRA has announced their plans to undertake climate change financial risk vulnerability assessments. These assessments, which are set to take place in 2020 and implemented in 2021, will start by scrutinizing Australia's biggest authorised deposit-taking institutions and should assist in providing an understanding of the impact of a changed climate on the economy at large. This will be analysed together with the Reserve Bank of Australia. The assessment will include entities appraising potential physical impacts of climate change and risks that could occur from the global shift to a low-carbon economy on their balance sheet. Once the assessment is completed in 2021, the intention is for the assessments to extend to other industries such as superannuation funds and insurance companies.
What should businesses be doing in the meantime?
APRA encourages entities to continue to adopt voluntary frameworks which assists them in assessing, managing and disclosing their financial risks associated with climate change. Geoff Summerhayes emphasises that entities should be proactive in assessing and mitigating climate change risks and not wait for further guidance from APRA in order to act. Industry resilience in response to climate change is required to prepare for the impacts a changing climate could have on the economy.
As such, APRA-regulated businesses, and industry at large, should continue to monitor the development of disclosure obligations, ensuring that the company and its directors are meeting their obligations and duties. With the looming regulation obligations, businesses should be proactive to consider how they can be ahead of the process, and ensure the longevity of their business to climate related risks.
The ongoing COVID-19 pandemic provides some commonalities and intersections with climate change. It is recognised by the World Health Organisation that climate change can contribute to the potential for pandemics and other health conditions. Supply chain risks are common to both pandemics and extreme weather events, with both acting as disrupters to the usual production and distribution of goods and labour.
For many businesses, the COVID-19 pandemic has exposed the gaps in their BCP, with some industries finding overnight that their business is unable to function with changes in supply chains, or bans on large public gatherings, brought on by the pandemic. This provides important lessons for all industries on the significance of having appropriate business interruption insurances, contingency plans, and flexible arrangements. It is important for businesses to review their current BCP for the future. In doing so the BCP should continue to consider climate change risks and opportunities when conducting the review.
Please contact us if you would like to discuss the issues raised in this article or if you need any assistance with disclosure obligations and assistance with review of your BCP, taking climate change risks and legal liabilities into account.
Note: quotes taken from APRA Letter https://www.apra.gov.au/sites/...