Response to submissions - Investment Governance: Revised prudential practice guide

APRA has today released guidance to assist RSE licensees in meeting their obligations under Prudential Standard SPS 530 Investment Governance (SPS 530). Enhancements to SPS 530 to strengthen investment governance practices commenced on 1 January 2023. 

The release of final SPG 530 represents the last step in the process of recent reforms to both SPS 530 and SPG 530. APRA commenced the process of uplifting and strengthening investment governance practices across the industry in September 2021 and has made changes, in consultation with stakeholders, to both SPS 530 and SPG 530 over this time.  

Final Prudential Practice Guide SPG 530 Investment Governance (final SPG 530) provides: 

• additional guidance to support requirements in SPS 530 relating to liquidity management, stress testing and valuations;  
  
   
• an outline of how APRA expects RSE licensees would consider material environmental, social and governance (ESG) risk factors as part of their overall investment risk management; 
  
   
• greater clarity in areas requested by industry in applying SPS 530; and 
  
   
• a more streamlined approach to guidance, bringing final SPG 530 in line with APRA’s Modernising the Prudential Architecture (MPA) strategic initiative.¹ 

Consultation overview 

On 17 November 2022, APRA released draft SPG 530 for consultation.² APRA received twelve submissions from RSE licensees, industry associations and other interested stakeholders and met with a number of these parties during the consultation period.  

Respondents were broadly supportive of draft SPG 530 but requested that APRA consider further guidance relating to ESG risks, stress testing, valuations, and governance of investments. These matters are discussed below. 

APRA’s approach to prudential guidance 

APRA is moving towards a simpler and more streamlined approach to providing guidance. Submissions welcomed the new guidance format, where guidance is directly linked to the relevant provisions of SPS 530.  

Some submissions requested APRA include more detail in SPG 530, not less. Final SPG 530 includes additional guidance, including some examples where APRA considers it useful to understanding its expectations.    

ESG risks 

Several submissions provided suggestions to enhance guidance relating to ESG risk. APRA has responded to calls for further clarity and consistency in the language relating to ESG risks and having an appropriate emphasis on ESG from a risk perspective. RSE licensees are encouraged to evolve their approach across all aspects of ESG risk, including the collection of appropriate data to help inform decisions.  

Stress testing 

Submissions queried how RSE licensees should interpret the relationship between the requirement in SPS 530 for annual stress testing and the benefits arising from more frequent stress testing (as included in draft SPG 530). 

APRA expects RSE licensees to consider the benefits that may arise from more frequent stress testing beyond the annual requirement in SPS 530, including on a quarterly basis or in line with criteria pre-determined by the RSE licensee. This position is reflected in final SPG 530. 

Valuations 

Submissions also raised questions about the guidance relating to valuations. APRA has addressed most of these questions in final SPG 530. While some submissions requested that APRA include detailed guidance in relation to valuations of indirectly held assets, APRA’s view is that the valuations guidance is equally relevant to different holding vehicle arrangements, including pooled and externally managed assets. No separate guidance has therefore been included for indirectly held assets. 

Governance 

Submissions requested further clarification on the governance requirements of the Board and management of RSE licensees. APRA notes that the board, as the accountable authority, ensures an appropriate investment strategy in line with the size and complexity of the business, and is responsible for the establishment of investment processes. As such, it is important that RSE licensees determine delegations and investment governance arrangements with their own operations and business structures in mind, following the principles outlined in the prudential standard. As noted in APRA's policy priorities, APRA is planning to commence a comprehensive review of its governance and board requirements later in 2023. 

APRA notes the concerns from some in industry about the delay in issuing final SPG 530, given that the updated SPS 530 commenced on 1 January 2023. In consultation and ongoing communication with RSE licensees over recent months, APRA has observed greater focus on valuation governance and liquidity management and more widespread use of stress testing processes, with RSE licensees seeking to enhance their practices consistent with draft SPG 530 since its release in November 2022. APRA does not expect that the timing of release of final SPG 530 will affect an RSE licensee’s ability to comply with SPS 530. If you have any queries in relation to this letter, please contact your APRA supervisor. 

Yours sincerely, 

 

Margaret Cole 

Deputy Chair 

APRA 

Footnotes

¹ Refer to APRA outlines plans to modernise the prudential architecture.

² Refer to Investment governance: Revised prudential practice guide