The Australian Prudential Regulation Authority (APRA) announced in its 2024–25 corporate plan that it will begin incorporating climate risk into its capital framework – the set of rules that determine how much financial buffer banks must hold to remain solvent during stress events. This marks a significant step toward embedding climate-related vulnerabilities into the core mechanics of banking regulation.
APRA’s move is not simply about aligning with global trends – it reflects an acknowledgement that climate risks are rapidly transitioning from theoretical to tangible.
From scenario analysis to real-world consequences
In 2022, APRA published a Climate Vulnerability Assessment (CVA) to test how major Australian banks would perform under severe climate scenarios. That exercise was largely exploratory – aimed at understanding data gaps and modelling capabilities. The forthcoming shift in capital settings, by contrast, will carry regulatory weight.
While APRA has not yet released a draft standard, it confirmed in recent publications that it is developing guidance to “provide clarity on how climate-related financial risks are to be considered in capital adequacy assessments.”
In practical terms, this means banks with higher exposure to climate-vulnerable sectors – or weaker transition plans – may be required to hold more capital.
A response to systemic risk
The move reflects growing concern that climate change could undermine the stability of Australia’s financial system if not addressed through core prudential tools. Physical risks such as floods and fires, and transition risks such as policy shifts and rapid asset repricing, are increasingly seen as financially material.
APRA Chair John Lonsdale has previously emphasised that climate risk should be treated with the same seriousness as traditional financial risks like credit and liquidity. In a 2023 speech, he underscored the importance of resilience against long-term risks, including climate change, cyber threats, and financial stress – calling for continued vigilance and stronger governance frameworks.
That tone is now being translated into regulation.
Implications for banks
Banks will need to review their climate risk modelling, scenario analysis, and disclosures – particularly if they wish to avoid punitive capital requirements. APRA has signalled it will take both quantitative and qualitative measures into account when assessing exposures.
Still, industry participants note that applying capital penalties or incentives based on climate metrics could prove difficult in the absence of robust and standardised data. This will likely be a major point of consultation when APRA releases its draft guidance later this year.
Despite the technical challenges, the message is clear: climate resilience is becoming a test of prudential soundness.
Global alignment – with Australian calibration
APRA’s capital overhaul aligns with broader international regulatory efforts, including those led by the European Central Bank (ECB), the Bank of England (BoE), and the Office of the Superintendent of Financial Institutions (OSFI) in Canada. But it is not a copy-paste job.
Australia’s economy, energy profile, and geography pose distinct challenges – from fossil fuel dependencies to regional exposure to extreme weather. APRA has repeatedly stated that any capital framework must be tailored to Australian conditions.
In her 2023 address to the Governance and Risk Management Forum, APRA Deputy Chair Helen Rowell stated that regulators must evolve their approach to meet emerging and long-term risks.
What’s next
A formal consultation on APRA’s proposed approach is expected later this year. In the meantime, financial institutions are being encouraged to upgrade their risk models and stress-test portfolios against climate-related variables.
APRA has also reiterated the importance of credible climate disclosures – warning in recent reviews that the maturity of climate reporting has declined in some parts of the industry.
This shift is part of a wider transformation in APRA’s regulatory posture – one that includes increased attention to operational resilience, non-financial risks, and transparency. As discussed in our earlier coverage of APRA’s supervisory pivot, this move underscores the regulator’s evolving understanding of what makes financial systems genuinely stable.
