What could APRA's climate guidance mean for ASX bank shares?

APRA has released draft guidance on the financial risks associated with climate change. What could this mean for ASX bank shares?

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The Australian Prudential and Regulatory Authority (APRA) has released draft guidance for financial institutions, including ASX bank shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB), about climate change.

APRA says the guidance "is designed to assist APRA-regulated entities in managing climate-related risks and opportunities".

Last month, Motley Fool Australia conducted an interview with the Climate Council of Australia, in which one of its economists said climate change could lead to "a COVID-sized shock every year."

While it is unlikely APRA's announcement in and of itself will have any noticeable, short-term impact on ASX bank shares, it is indicative of the future operating environment these giant financial institutions will be operating in.

Let's take a closer look at the draft guidance.

APRA's draft guidance on climate change

Last Thursday, APRA announced its release of the draft Prudential Practice Guide CPG 229 Climate Change Financial Risks. The government regulator says the draft guidance was released because industry wanted greater certainty about its future risks and exposure to climate change.

As the draft paper is only a guidance, it does not place any new regulatory burdens on ASX bank shares. The regulator says its approach "is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy." Banks will not be compelled to divest out of any high-emitting industries, refuse loans, or readjust insurance claims because of climate change.

APRA chair's comments

APRA chair Wayne Byres commented that it is important for financial institutions to be well-prepared for any and all financial risks. He said:

Since the Australian Government became a party to the Paris Agreement, APRA has been raising awareness of climate-related risks to the financial sector. Given the unique and long-term nature of the risks, however, processes to measure, monitor and manage climate-related financial risks are still developing.

The prudential practice guide doesn't direct or prevent APRA-regulated entities making any particular business or investment decision. Rather, it is aimed at ensuring decisions are well-informed and appropriately consider both the risks and opportunities that the transition to a low carbon economy creates.

Additionally, speaking to the Australian Broadcasting Corporation (ABC), Mr Byres said he wants to ensure Australia's largest banks are taking the risks of climate change seriously.

The climate is changing, government policies around the world are changing, that's impacting economies and industries that are changing, investor expectations are changing, and in some cases all of that change is happening quite quickly.

How will ASX bank shares respond?

Motley Fool Australia approached the largest of the ASX banks by market capitalisation for comment on APRA's climate change guidance. A spokesperson for ANZ said, "ANZ welcomes further guidance from APRA and is reviewing the document."

A Commonwealth Bank spokesperson said:

We are aware of, and are currently reviewing, APRA's draft guidance on managing the financial risks of climate change that was released last week. We continue to work closely with APRA and the broader industry as we strive to limit climate change in line with the goals of the Paris Agreement and support the global transition to net zero emissions by 2050.

The spokesperson added that Commonwealth Bank has been disclosing how it is managing climate-related risks since 2018.

A spokesperson for National Australia Bank, when asked for comment, redirected Motley Fool Australia to comments made by its chief risk officer, Shaun Dooley, to the Australian House of Representatives Committee on Economics.

In his comments to Parliament, Mr Dooley said the bank was working closely with APRA to understand, and get ahead of, the financial risks of climate change.

Westpac and Macquarie Group Ltd (ASX: MQG) did not respond when asked for comment.

Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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