APRA provides guidance on managing the financial risks of climate change

• understand risks and opportunities that may arise from a changing climate;
• ensure investment, lending, and underwriting decisions are well-informed; and
• implement proportionate governance, risk management, scenario analysis and disclosure practices

• Physical climate risks, which includes both long-term changes in climate, as well as changes to the frequency and magnitude of extreme weather events, can cause direct damage to assets or property, changes to income and costs, and changes to the cost and availability of insurance;
• Transition climate risks, which include risks related to changes in domestic and international policy, technological innovation, social adaptation and market changes, which can result in changes to costs, income and profits, investment preferences and asset viability; and
• Liability risk, which stem from the potential for litigation if institutions and boards do not adequately consider or respond to the impacts of climate change

• credit risk through a potential increase in defaults on loans and declining asset values;
• market risk through the impact of potential re-pricing of financial instruments and corporate debt;
• ·operational risk through the risk of supply chain disruption and forced facility closures;
• underwriting risk through a potential increase in insured losses as a result of more frequent and/or extreme weather events;
• liquidity risk through an increased demand for liquidity and difficulties that may be faced in liquidating assets negatively impacted by climate risks; and
• reputational risk

The ultimate responsibility for good governance rests with an entity's board of directors (see prudential standards CPS 510 and SPS 510). APRA therefore considers it prudent practice for the board to seek to understand and regularly assess the financial risks arising from climate change that affect the institution, now and into the future.

The board may delegate certain functions of the management of climate risks but, as with other risks, needs to maintain mechanisms for monitoring the exercise of this delegated authority. Board-level engagement is important to ensure that work on climate risks holds sufficient standing within an institution, and gives the board the requisite institution-wide insights to strategically respond to the risks.

APRA also expects that a prudent board should understand and be able to discuss climate risk at meetings, even if that requires training. Periodic reviews of climate risks and opportunities (both short and long-term) should also be enshrined in meeting agendas.

 Under CPS 220 and SPS 220, the board of an APRA-regulated institution is ultimately responsible for both the institution’s risk management framework, and for the oversight of its operation by management. The monitoring and management of all material risks also falls on senior management. APRA considers it prudent for climate risks to be considered within an institution’s existing framework, including the board approved risk appetite statement, risk management strategy and business plan.

An institution should include the management of climate risks within its written risk management policies, management information, and board risk reports. Where climate risks are material, this may require updating existing risk management policies and procedures.

When monitoring these risks, institutions are encouraged to utilise both a qualitative and quantitative approach, including developing appropriate metrics. Data should be used from both publicly available and proprietary sources, and potentially from external experts where necessary (including academics, specialist consultants, and scientific bodies).

Scenario testing should be tailored to each institution's size, market exposures and geographical locations. It should involve both short-term assessments in line with business planning cycles, as well as longer term assessments that factor in scenarios such as future global temperature rises, transitions to a lower-emission economy (both orderly and disorderly), and natural disasters and catastrophes.

The disclosure of climate risk information allows interested stakeholders to assess an institution’s resilience. There is increased demand from investors and other stakeholders for disclosure on climate-related risks, a lack of absolute certainty in relation to climate risks’ future impacts should not be considered a reason to avoid disclosure of exposure to these risks.