Australia's prudential regulator enters 2025 with its climate risk supervision framework firmly in place, following several years of structured engagement with major banks and the commencement of mandatory climate-related financial disclosures for large entities under new federal legislation. The Australian Prudential Regulation Authority has positioned climate change as a core financial risk requiring the same rigour as credit or operational exposures.
The regulator's Prudential Practice Guide CPG 229, which sets out expectations for how regulated institutions should identify, measure, manage and disclose climate-related financial risks, continued to be actively enforced throughout 2024. CPG 229 makes clear that climate risk is not a future consideration but a present financial risk that boards and senior management must address through governance structures, scenario analysis and strategic planning.
FOUR YEARS OF CLIMATE VULNERABILITY WORK
The Climate Vulnerability Assessment programme, conducted with Australia's largest banks between 2022 and 2024, has been central to APRA's supervisory approach. The CVA exercises required participating institutions to model how their loan books and balance sheets could be affected under a range of climate scenarios, covering both physical risks — such as increased frequency of extreme weather events — and transition risks arising from the shift to a lower-carbon economy.
The programme gave APRA granular insight into sector-wide exposures and allowed the regulator to benchmark how different institutions were approaching scenario analysis and risk quantification. Findings from the assessments have informed APRA's ongoing supervisory dialogue with individual banks and contributed to the development of better-practice guidance on climate risk governance.
Throughout 2024, APRA continued to signal that institutions lagging in climate risk capability could expect closer supervisory scrutiny. The regulator has emphasised that preparedness is not optional and that gaps in governance or risk management will be reflected in supervisory assessments.
MANDATORY DISCLOSURE ADDS REPORTING LAYER
The wider regulatory landscape shifted materially at the start of financial year 2025, when mandatory climate-related financial reporting commenced for large entities under the Treasury Laws Amendment legislation. The framework, which applies to entities meeting certain size thresholds, requires disclosures covering governance, strategy, risk management and climate-related metrics and targets — broadly aligned with the standards of the International Sustainability Standards Board.
For major Australian banks, the new reporting requirements layer a compliance obligation on top of the supervisory expectations already embedded in CPG 229. Institutions must now disclose climate information to investors and the market in a standardised format, increasing accountability and allowing comparisons across the sector. APRA has indicated it will consider published disclosures as part of its broader supervisory intelligence on each institution's approach to climate risk management.
The combination of the CVA programme's analytical foundations, the CPG 229 supervisory framework and the incoming mandatory disclosure regime means Australian banks face a comprehensive and increasingly formalised set of expectations on climate risk as 2025 begins. APRA's programme reflects a broader push among global prudential regulators to ensure that climate change is addressed as a systemic financial risk rather than a peripheral sustainability concern. For Australian lenders, this means embedding climate risk into credit underwriting, capital planning and strategic decision-making in a manner that satisfies both the regulator and, increasingly, a market of investors paying close attention to climate-related disclosures.