APRA identifies marked decline of maturity in climate risk disclosures
26 November 2024
26 November 2024
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.
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.
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.
Several factors may have contributed to this decline in disclosure 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.
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:
Authors: Elena Lambros, Risk Advisory Partner; James Clarke, Partner; Miriam Kleiner, Partner; Edmond Park, Partner; Edmund Bosworth, Risk Advisory Director and Ross Allanson, Paralegal.
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