Risk management and climate change

  • Governance professionals need to include consideration of climate risk as a key part of their roles.
  • In April, APRA released a new draft prudential practice guideline on the topic of climate change financial risks.
  • This article provides a brief overview of the most relevant parts of the APRA guideline and outlines how governance professionals can address the risks and opportunities associated with climate change within their organisations.

Governance professionals are increasingly focusing on the risks and opportunities associated with climate change. Many of Australia’s key trading partners have now adopted ‘net zero’ by mid-century pledges to reduce emissions. While the ‘politics’ of climate change in Australia remains contested, the science and organisational duties professionals have to mitigate climate risk are becoming very clear. Over the past few years, there has been increased focus by various regulatory authorities, central banks and governments about how organisations are addressing the material financial and non-financial risks that manifest as a result of anthropogenic (human-induced) climate change. 

The latest regulatory guidance is from the Australian Prudential Regulation Authority (APRA). In April, APRA released a new draft prudential practice guideline (CPG 229) on the topic of climate change financial risks. While the guideline is directed towards companies in the financial services industry, many aspects can be adopted by all organisations as they implement their climate change risk management frameworks. This article provides a brief overview of the most relevant parts of the APRA guideline and outlines how governance professionals can address the risks and opportunities associated with climate change within their organisations.

The key aspects of the APRA guideline

The APRA guideline closely follows the framework established by the Taskforce for Climate Related Financial Disclosures (TCFD). The key aspects organisations need to be focused on are:

  • understanding the risks of climate change as they apply to the organisation (and organisations that they may have dealings with or are impacted by).
  • governance and the roles and responsibilities of key stakeholders within the organisation.
  • risk management and in particular: policies and procedures; risk identification; risk monitoring; risk management; and risk reporting.
  • scenario analysis which allows the organisation to prepare and plan for various futures that may come about due to the overarching risks presented by climate change.
  • disclosure of the risk management framework adopted by the organisation and the identification of key risks, scenario analysis and governance. 

The science

Climate scientists say that it is unequivocal that human beings are having an impact on the Earth’s climate. Producing greenhouse gas emissions increases the concentration of greenhouse gases in the atmosphere which increases global temperatures. To avoid the worst impacts of climate change, all nations have committed to working together to limit anthropogenic climate change to no more than 2 degrees Celsius above pre-industrial revolution levels. Recent analysis indicates that global emissions need to peak this decade and rapidly fall by 2050. For Australia, this could imply emission reductions significantly beyond the existing commitment of a reduction of 26‒28 per cent by 2030 relative to 2005 levels. In fact, some scientists think Australia may need to target 60 per cent reductions by 2030 and be ‘net zero’ by 2050.

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