The Climate Vulnerability Assessment (CVA), a collaborative project with Australia’s largest five banks, is central to APRA’s efforts to ensure regulated entities understand and manage financial risk associated with climate change.
According to APRA, the participating banks include ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac, with all five expected to submit their first CVA analysis towards the end of this year, while the publication of aggregated results and findings is expected early next year.
The CVA evaluates two plausible scenarios for how climate change, and the globe’s reaction to it, will unfold. The report will assess how the physical and transitory risks posed by the scenarios could expose vulnerabilities in financial institutions, alongside the financial system and economy at large.
“APRA began the CVA program in the banking sector due to its centrality to the Australian financial system, as well as the potential impacts associated with climate risk across the portfolios, from household mortgages to business exposures,” said APRA chair Wayne Byres.
He explained that the results should help the boards and management of participating institutions to understand and proactively address any identified risks, as well as capitalise on new opportunities.
“They will also help regulators with a better picture of the nature of the risks, and how financial institutions plan to respond,” Mr Byres noted.
According to APRA, the scenarios posed by the CVA were taken from publishings by the international Network for Greening the Financial System and tailored to Australian conditions.
The first scenario explores a situation wherein higher transition risks are present as action on reducing emissions is either delayed or divergent across countries and sections.
The second scenario assumes further action on climate change is limited, resulting in insufficient barriers to halt significant global warming, resulting in more physical risks.
“Climate change is a global challenge and is driving major policy responses and investment decisions around the world. These will have consequences for Australian companies, presenting both risks and opportunities,” Mr Byres said.
“Understanding how, where and over what timeframe these risks will play out is a test for financial regulators, as much as it is for institutions”.
APRA is also set to continue its collaboration with international peers to gain insights it can use to refine and strengthen its understanding, and ensure Australian financial institutions are appropriately managing those risks.
