The prudential watchdog has issued draft guidance to banks, insurers and superannuation trustees on managing the financial risk of climate change.
Released for consultation, the Australian Prudential Regulation Authority says the guide is designed to assist regulated entities in managing climate-related risks and opportunities as part of their existing risk management and governance frameworks.
APRA chair Wayne Byres said it is important that APRA-regulated entities are prepared to respond to financial risks, whatever form they may take.
"Since the Australian government became a party to the Paris Agreement, APRA has been raising awareness of climate-related risks to the financial sector," Mr Byres said in a statement on Thursday.
"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 guide covers three risk components: physical, transition and liability.
It warns of lower asset values, increased insurance claims and supply chain disruption from changing climate conditions and extreme weather events.
In the transition phase to a low carbon economy - and the resulting policy changes, technological innovation and social adaption - it sees an impact on demand, and risks from "stranded assets" and loan defaults.
However, not considering or responding to the impact of climate change could result in business disruption leading to litigation and penalties.
Mr Byres said the guide isn't intended to direct or prevent 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," he said.
Nicolette Boele of the Responsible Investment Association Australasia said it marks a significant step forward, recognising that Australia's future resilience and prosperity depends on being able to navigate climate change risk.
"We would hope, as in New Zealand, this guidance becomes mandatory, so that all financial institutions are pricing and valuing companies within the portfolios they manage, as well as realigning portfolios to contribute to a lower carbon world," she said.
APRA is seeking stakeholder feedback on the draft advice by July 31 and, subject to feedback, the final guide is expected to be released before the end of the year.
