APRA identifies marked decline of maturity in climate risk disclosures

What you need to know

• ASIC and APRA have indicated that industry approach to climate risk and sustainability remains a critical regulatory and supervisory focal point.
• APRA's 2024 Climate Risk Self-Assessment Survey results indicate that the average level of climate risk maturity for large banks has improved since 2022, while it is broadly unchanged across large insurers and superannuation trustees.
• While there has been average improvement across other categories of climate risk management (including governance and strategy, risk management, metrics, and targets), there has been a marked decline of maturity in climate risk disclosure.

What you need to do

• Evaluate risk and compliance frameworks to understand your current maturity regarding climate risk.
• Implement effective systems, controls and governance to capture and report on sustainability and mitigate risk relating to sustainability performance (including record-keeping processes).
• Review, or establish a transition plan as a communication and strategy document that links broader business strategy and management of climate related risks.
• Integrate scenario analysis and stress-testing to ensure the correct processes are in place to protect your business strategy.

In September 2024, the Federal Government enacted legislation relating to mandatory climate-related financial disclosure. This means that entities required to lodge financial reports with ASIC under Chapter 2M of the Corporations Act 2001 (Cth) will be required to lodge a sustainability report (which includes climate-related financial disclosure) with ASIC, provided those entities meet certain financial or other criteria. The timing for lodgement is dependent upon the size of the entity, with the largest entities (ASX 200) expected to report for the first financial year ending after 1 January 2025.

Both ASIC and APRA have indicated that industry approach to climate risk and sustainability remains a critical regulatory focal point. This is in the context of recent regulatory focus on greenwashing and heightened attention given to public disclosure of climate-related information by organisations. ASIC and APRA's 2024-25 Corporate Plans outline addressing climate risks posed by the financial system as key strategic priorities and ASIC's recently released 2025 Enforcement Priorities suggests that this attention is likely to continue.

On 7 November 2024, ASIC invited comment on Consultation Paper 380 Sustainability reporting, which included draft regulatory guidance for entities required to prepare a sustainability report under Ch 2M of the Corporations Act. The draft regulatory guidance provides helpful clarity but does not significantly add to the regulated community's understanding of the statutory requirements, particularly in relation to forward-looking statements. ASIC has indicated that it will consider providing further guidance on this point.

ASIC has also indicated that it is now open to receiving exemption applications in relation to mandatory climate-related financial disclosure. The grounds for seeking such an exemption are the same as those which exist for seeking an exemption in relation to financial reporting.

Climate Risk Self-Assessment Survey 2024

On 13 November 2024, APRA released the results of its Climate Risk Self-Assessment Survey 2024, a voluntary survey that explored climate risk maturity among a sample of APRA-regulated banks, insurers and superannuation trustees. The results of this survey revealed some interesting insights and are likely to inform APRA and ASIC's approach to regulation and enforcement of the climate-risk obligations of APRA regulated entities.

Decline in Disclosure Maturity

The 2024 survey results indicate that the average level of climate risk maturity for large banks has improved since 2022, while it is broadly unchanged across large insurers and superannuation trustees.

More specifically, while there has been average improvement across other categories of climate risk management (including governance and strategy, risk management, metrics, and targets), there has been a marked decline of maturity in climate risk disclosure.

In the 2022 survey, disclosure was the area of highest maturity among large entities. However, the results of the 2024 survey identified climate risk disclosure as the area with the lowest maturity. This is an interesting development given the increasing stakeholder demand for more reliable and timely disclosures.

Contributing Factors

Several factors may have contributed to this decline in disclosure maturity:

• Evolving Regulatory Landscape: The regulatory and standard-setting environment for climate-related financial disclosure is rapidly changing. Entities may have slowed the development of their climate disclosure capabilities over the last two years as they seek to better understand this evolving landscape before investing in capability growth.
• Reassessment of Mature Disclosure Practices: The decline may also reflect a reassessment by entities of what constitutes mature disclosure practice. As the expectations for mature disclosure practices evolve, entities may have adjusted their self-assessments accordingly.
• Resource Allocation: APRA-regulated entities, particularly those with fewer available resources, may be waiting for further certainty in the regulatory and standard-setting environment before investing in additional capabilities to support public climate risk disclosure, especially those who are also trying to implement the financial accountability regime and CPS 230 at the same time. This cautious approach may explain why expanding the survey sample size has seen the average maturity of sustainability disclosures fall in the last two years.

Where does investment lifecycle factor in to climate risk maturity?

While the 2024 Climate Risk Self-Assessment Survey provides valuable insight into how APRA-regulated entities manage climate risks, it does not explicitly investigate whether superannuation and insurance providers have checked if their investments, particularly those managed by third-party investment managers, pose climate risks.

The survey focuses on broader aspects of climate risk management, governance, metrics, and disclosure, without delving into the specifics of third-party investment management practices. This is an area potentially requiring further consideration given that a not-insignificant number of APRA-regulated entities (particularly insurers and superannuation funds) rely on third-party investment managers and may have little visibility about the lifecycle of their investments or how those investments may pose climate-related risks.

Potential impact on CPS 220 and SPS 220 amendments

A further point of interest in the survey is how the results may impact APRA's intended amendments to prudential standards CPS 220 and SPS 220. Both standards outline the risk management requirements for APRA regulated entities and APRA has announced that it will commence consultation in 2025 on amendments including climate risks to the standards.

Based on the survey findings, APRA's approach to the amendments may be influenced in the following ways:

• Integration of Climate Risk into Risk Management Frameworks: In addition to direct risk, APRA's amendments could involve identifying climate risk as a unique risk category and as a driver of other established risks, such as credit, market, and operational risks.
• Board and Senior Management Responsibilities: The survey highlights gaps in board expertise and the delegation of climate risk responsibilities. The amended standards may emphasise the need for boards to have members with climate risk expertise and for clear delegation of climate risk management responsibilities to senior management.
• Metrics and Targets: To address the variability in metrics and targets, APRA may provide more detailed guidance on the development and use of quantitative and qualitative metrics for measuring and monitoring climate risk.
• Enhanced Disclosure Requirements: Given the decline in disclosure maturity, APRA may introduce more stringent and specific disclosure requirements in the amended standards to discourage stagnancy.
• Scenario Analysis and Stress Testing: The survey indicates that scenario analysis is a common practice, but there is room for improvement. The amended standards may reflect the practices outlined in principle 13 of the Basel principles for the supervision of climate-related financial risks, which include proactively projecting those risks to assist with future resiliency. This may place a higher expectation on providing appropriate evidence that business strategies have been tested against different climate scenarios and associated risk management plans prepared.

Authors: Elena Lambros, Risk Advisory Partner; James Clarke, Partner; Miriam Kleiner, Partner; Edmond Park, Partner; Edmund Bosworth, Risk Advisory Director and Ross Allanson, Paralegal.