Australia's banking regulator finalises climate change policy guidance

retains the view that boards should maintain the discretion to design a remuneration framework that is appropriate for their institution." The regulator will conduct a survey on climate change financial risk to understand the level of alignment between institutions' management of climate change financial risks, the new guidance and the TCFD recommendations.

Australia's banking regulator released on Friday its final guidance for banks, insurers and pension funds to manage financial risks associated with climate change, stopping short of imposing new rules. The Australian Prudential Regulation Authority (APRA) said the principle-based guide is aligned with recommendations from the Financial Stability Board's Disclosures Task Force on Climate-related Financial (TCFD) set up by the G20 rich countries to coordinate rules.

"Most APRA-regulated entities recognise the potential challenges of climate change, such as ... new laws or adjustments in asset values, but they don't always have a good understanding of how to respond," APRA Chair Wayne Byres said. The guidance paper followed a draft version published in April for consultation and "is a direct response to their request for more clarity about regulatory expectations and examples of better industry practice," Byres said.

The guidance https://www.apra.gov.au/consultation-on-draft-prudential-practice-guide-on-climate-change-financial-risks calls for financial companies to immediately start managing climate change risks within their existing risk management frameworks. It calls for directors to set "exposure limits and thresholds for the financial risks that the institution is willing to bear" when climate risks are considered material.

Management must also set clear lines of responsibilities in the managing climate-related risks, and company boards must hold senior management to account for such responsibilities. But it does not asks for an explicit alignment between climate risk management and executive remuneration.

"Some international regulators are increasingly making a direct connection between climate risk and remuneration. APRA ... retains the view that boards should maintain the discretion to design a remuneration framework that is appropriate for their institution." The regulator will conduct a survey on climate change financial risk to understand the level of alignment between institutions' management of climate change financial risks, the new guidance and the TCFD recommendations.

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