Council of Financial Regulators Climate Change Activity Stocktake Paper 2024

Prepared by CFR Climate Working Group

This paper sets out the recent activities and planned work of the Council of Financial Regulators Climate Working Group (CFR CWG).

Executive Summary

Over the financial year to June 2024, the CFR CWG's work focused on the following areas:

• Exploring the impact of climate change through scenario analysis, monitoring climate-related trends in domestic financial markets, and enhancing climate modelling capability.
• Improving transparency and consistency of sustainability-related information by promoting good governance, disclosure, and compliance with existing laws while progressing the implementation of internationally aligned climate-related financial disclosure requirements.
• Supporting the development of an Australian sustainable finance taxonomy; and
• Continuing Australia's domestic and international engagement on sustainable finance.

For the financial year to June 2025, the CFR CWG has identified three priorities which continue existing work programs and are aligned to the three pillars of the Government's Sustainable Finance Roadmap. These are:

1. Improving the transparency and consistency of climate and sustainability-related information to support the efficient operation of markets and effective allocation of capital. The CFR CWG will continue the governance oversight of ASFI's taxonomy development and support the rollout of climate-related financial disclosure requirements.
2. Enhancing the financial system capability to respond to sustainability challenges. APRA will deliver the Insurance Climate Vulnerability Assessment in the first half of 2025, and Treasury has undertaken a consultation process to review the superannuation performance test settings to ensure a fit-for-purpose regulatory framework. The reforms outlined in the Sustainable Finance Roadmap, including developing Australia's sustainable finance taxonomy and a sustainable investment product labelling regime, will progress. The CFR CWG will provide advice to the Government on options to address sustainability-related data challenges in 2025.
3. Continuing Australia's international engagement to support the development of best practices in sustainability risk management and high-quality interoperable sustainable finance frameworks. APRA continues as a member of the NGFS Steering Committee (until December 2024) and is Co-Chair of the NGFS Adaptation Task Force. The Task Force will produce a concept note which is due to be published ahead of the next global climate talks in November 2024. The CFR CWG is increasing cooperation with New Zealand regulatory counterparts and international agencies.

Background

Established in 2017, the CFR CWG is a forum for APRA, ASIC, RBA, and Treasury to consider and coordinate actions that enhance the ability of financial market participants to manage financial risks and identify opportunities associated with climate change. The last update from the CFR CWG was provided to the CFR in September 2023.

Australia's financial system has a central role to play in achieving the climate and sustainability goals set out by the Government in its Sustainable Finance Roadmap (“the Roadmap”). The CFR CWG's focus areas are aligned with the Roadmap's strategic pillars.

Summary of activities in 2023/24

Over the 2023/24 financial year, the CFR CWG focused its activities on the following Roadmap priority areas:

• Exploring the impact of climate change
  

  CFR CWG members are undertaking research and analysis to understand economic and financial impacts of climate change on households and the broader domestic financial system. The CFR agencies have championed this work publicly and shared insights where applicable.

  APRA, with support from other agencies, launched the Insurance Climate Vulnerability Assessment, a project investigating the outlook for household insurance affordability under two future climate scenarios. Complementing APRA's work, the RBA has continued to build an understanding of the impacts of climate-related risks on the financial system. This included monitoring climate-related trends in domestic financial markets and assessing physical risk in residential mortgage-backed securities.

  Treasury has enhanced its climate modelling capability and deepened its understanding of the macroeconomic impact of climate change and related policy responses.

  Senior representatives from the CFR agencies have engaged with the financial industry, speaking at various forums about the risks and opportunities posed by climate change within each agency's area of responsibility.

• Improving transparency and consistency of sustainability-related information
  

  Targeted conduct regulation, uplifting climate risk assessments and increased disclosure requirements, supported by new sustainability standards and reporting frameworks, aim to provide stakeholders with clearer and more reliable sustainability information, and foster more informed decision-making and greater trust in the financial system.

  Sustainable finance is a strategic priority for ASIC under its 2023-2027 Corporate Plan. In 2023/24, ASIC targeted misleading conduct in sustainable finance, including greenwashing, and published a report summarising its interventions from April 2023 to June 2024. Key outcomes from ASIC's greenwashing surveillance programs included:

  • winning its first greenwashing civil penalty action against Vanguard Investments Australia;
  • obtaining a successful outcome in its civil penalty proceeding against the trustee of superannuation fund Active Super, concerning misleading ESG claims;
  • obtaining a penalty of $11.3 million against Mercer Superannuation (Australia) Limited in its first greenwashing civil penalty action brought before the Federal Court;
  • issuing seven infringement notices in relation to alleged greenwashing misconduct totalling over $109,000; and
  • obtaining 34 corrective disclosure outcomes.

  APRA commenced its second voluntary Climate Risk Self-Assessment Survey, inviting all APRA-regulated entities to participate. Insights from the survey will be published in late 2024 and considered in APRA's ongoing supervisory activities.

  The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 passed the Senate on 22 August 2024 and sets mandatory climate-related financial disclosure requirements for large businesses and financial institutions (Group 1 entities) from 1 January 2025. Group 2 and 3 entities will be brought into the regime over time, based on their size. ASIC will administer and enforce the climate-related financial disclosure requirements.

  All CFR agencies reported on operational emissions under the Department of Finance's APS Net Zero emissions reporting framework. APRA also voluntarily disclosed its scope 3 emissions associated with domestic and international travel, while the RBA also reported on other climate-related initiatives.

• Supporting the development of an Australian Sustainable Finance Taxonomy
  

  Building on its taxonomy scoping project, the Australian Sustainable Finance Institute (ASFI) is developing preliminary sustainable finance taxonomy screening criteria, focusing on climate mitigation objectives for six priority economic sectors. The six sectors are: electricity generation and supply; minerals, mining, and metals; construction and the built environment; manufacturing; transport; and agriculture. The taxonomy will provide common, agreed-upon standards and definitions regarding the sustainability characteristics of different activities. It will support the availability of credible information for investment decision-making. ASFI consulted on its first three priority sectors — electricity generation and supply; minerals, mining, and metals; and construction and the built environment — between 28 May 2024 and 30 June 2024. ASFI will consult on the criteria for all six sectors as well as the ‘do no significant harm' and ‘minimum social safeguards' criteria by Q4 2024. The initial sustainable finance taxonomy is expected to be delivered to the Government by the end of 2024.

  The CFR CWG's role during the initial development phase of the taxonomy was to oversee AFSI's governance processes in developing the taxonomy. This governance role has been extended through to the end of 2024 as Treasury advises on and establishes a permanent governance arrangement for the taxonomy.

• Continuing Australia's international engagement on sustainable finance.
  

  The CFR CWG agencies have worked with their international peers to enhance the consistency and interoperability of sustainable finance frameworks, and the financial sector's ability to manage climate-related risks. This work included developing climate scenarios and risk frameworks to improve sustainability disclosures and investor protection.

  ASIC continued its membership of the International Organisation of Securities Commissions' (IOSCO) Sustainable Finance Taskforce (SFT) which is focused on improving sustainability-related disclosures by issuers and asset managers and promote investor protection.

  The RBA and APRA are engaged in the Network for Greening the Financial System (NGFS), contributing to the development of climate scenarios, nature-related risk frameworks, and supervisory guidance. APRA is an NGFS Steering Committee member and is Co-Chair of the NGFS Adaptation Task Force which is exploring the challenges and potential responses to climate change adaptation. The first output of this Task Force is due to be published ahead of the global climate talks in November 2024.

  Treasury has enhanced its international engagement, consistent with the Government's Sustainable Finance Strategy, to support the development of international sustainable finance frameworks. It has, together with the RBA, continued to collaborate with partners in the Sustainable Finance Working Group of the G20, which is implementing a roadmap to support the consistency and interoperability of sustainable finance frameworks. It has also deepened its engagement with key partners such as Indonesia and New Zealand through activities including hosting a sustainable finance dialogue in Sydney with Indonesian counterparts and establishing a Sustainable Finance Working Group with the New Zealand Government.

  APRA continued its engagement on climate risk with the International Association of Insurance Supervisors (IAIS) and as part of the Basel Committee on Banking Supervision (BCBS)'s Task Force on Climate-Related Financial Risks (TFCR). The CFR CWG also supported the work of the Financial Stability Board (FSB) which is implementing a roadmap for climate-related financial risks. The RBA participates in the FSB's Climate Vulnerabilities and Data Working Group, which is developing a framework and analytical toolkit for assessing climate-related financial risks.

Priorities for 2024/25

The CFR CWG has identified three priorities for the 2024/25 financial year, which continue existing work programs and are aligned to the three pillars of the Government's Sustainable Finance Roadmap. These are:

1. Improving the transparency and consistency of climate and sustainability-related information to support the efficient operation of markets and effective allocation of capital.
   

   Treasury will publish a report on the oversight of ASFI's taxonomy development and, together with the other CFR CWG agencies, continue to provide governance oversight for the initial development phase of the taxonomy.

   Treasury will also continue to develop policy and consult with stakeholders on best practice transition planning guidance and investment product labelling.

   To support fair and efficient markets and confident and informed investors, ASIC will play a central role in administering and, where appropriate, enforcing the climate-related reporting requirements in the Corporations Act. In the 2025 financial year, ASIC will support compliance with the new requirements by providing regulatory guidance.

2. Enhancing the financial system capability to respond to sustainability challenges.
   

   The Insurance Climate Vulnerability Assessment (ICVA) being conducted by APRA with the support of the other CFR agencies will help to identify potential systemic risks of insurance affordability. Insights from the ICVA will be published in 2025.

   Treasury has undertaken a consultation process to review superannuation performance test settings to ensure fit-for-purpose regulatory frameworks. The CFR CWG will support Treasury in implementing the sustainable finance reforms outlined in the Roadmap, including developing Australia's sustainable finance taxonomy and a sustainable investment product labelling regime.

   APRA will lead the CFR's work program to provide advice to the Government on options to address sustainability-related data challenges in 2025. In line with its 2024-2025 Corporate Plan, APRA will work to uplift its supervision activities to better include consideration of climate-related risks in 2025.

   Following the increased greenwashing-related enforcement activity in 2023/24, ASIC will continue to undertake market supervision through greenwashing investigation and enforcement.

   The RBA will continue its research into the effect of climate change on the structure and operation of the economy, financial stability, and its implications for monetary policy.

3. Continuing Australia's international engagement to support the development of best practices in managing sustainability-related risks.
   

   APRA is a member of the NGFS Steering Committee until December 2024 and is now Co-Chair of the NGFS Adaptation Task Force. The CFR CWG will liaise with its New Zealand counterparts to discuss regional developments and opportunities. The CFR agencies will continue to work with international bodies, including the IAIS, BCBS, the International Sustainability Standards Board (ISSB), IOSCO, the FSB and the G20 Sustainable Finance Working Group.