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Australia's Finance Body Plans Climate-Risk Rules Release



By Kevin Morrison

February 8, 2021 - One of the priorities of Australia's financial regulator the Australian Prudential Regulation Authority (APRA) this year will be the development of a framework for the assessment and monitoring of climate-related financial risks in the country's financial system, which will provide guidance on climate risks of lending to the fossil fuel sector.

APRA, which oversees banks, insurance firms, pension funds and any deposit taking institution, plans to issue the climate risk guidance in the first half of 2021 when it will be open to industry consultation. The guidance is proposed to be finalised by the end of this year. The guidance includes governance, strategy, risk management, scenario analysis and disclosure, APRA said in an information paper on its supervision priorities for 2021.

Climate change is a driver of financial risks for all APRA-regulated entities, APRA said. "While the financial nature of these risks is increasingly understood, there remains a need for regulated entities to enhance their capacity to manage and respond to climate risks," it said. Australia is the world's second largest exporter of thermal coal and recently pipped Qatar to be the world's largest LNG exporter. Qatar shipped 78.3mn t of LNG in 2018 compared with 78.1mn t in 2020.

Some supervision initiatives were deferred because of Covid-19, but the APRA remains committed to ensuring that regulated entities take a strategic and risk-based approach to the management of climate-related financial risks, it said.

APRA plans to strengthen the understanding and management of climate-related risks within the financial sector by developing a climate vulnerability assessment (CVA), which will explore the potential financial exposure and macroeconomic risks for large banks, the financial system and economy from both physical and transition climate risks.

The CVA will assist APRA in understanding how large banks might adjust their business models in response to different climate change scenarios, APRA said.

Australian bank ANZ in November said it will exit all lending to companies with exposure to thermal coal either through extraction or power plants by 2030, as part of its new lending criteria to support the 2015 Paris climate agreement target of net-zero greenhouse gas emissions by 2050.

ANZ was the last of Australia's four largest banks to commit to exiting loans to thermal coal activities, with fellow Australian bank Westpac pledging to neither lend money nor invest in the thermal coal mining industry from 2030.