Financial services must focus on climate change risk reporting

The Prudential Regulation Authority (PRA) says banks and insurers need to do more to manage the financial risks from climate change

Few financial services firms are taking a strategic approach that considers how current actions affect future financial risks, according to the outcome of a recent PRA consultation.

The regulator said it had 54 responses to its consultation paper, Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change, with some respondents urging the PRA to move more quickly and decisively on climate change issues.

Following consideration of respondents’ comments, the PRA has issued a supervisory statement outlining changes in several areas.

These are providing more clarity on the timescales appropriate for scenario analysis; updating the wording of the disclosure expectations in response to requests for clarification; and clarifying that financial positions related to climate vulnerable assets cannot always be hedged, so firms should not rely on that assumption.

The PRA expects firms to have an initial plan in place to address the expectations and submit an updated senior management function (SMF) form by 15 October 2019.

However, firms should note that expectations on firms and SMF holder(s) will take into consideration the evolving understanding of what best practice looks like. The PRA intends to publish more detailed expectations in due course.

The PRA and Financial Conduct Authority (FCA) have established the Climate Financial Risk Forum (CFRF) to support the integration of climate-related factors into financial decision making, for example by developing analytical tools and techniques.

The outputs from the CFRF, supervisory engagement, and the PRA’s international work with the Central Banks and Supervisors Network for Greening the Financial System (NGFS) will inform the PRA’s approach to supervising these expectations and the PRA will keep its climate change policy under review.

Jon Williams, sustainability & climate change partner at PwC and member of the FSB's Task Force on Climate-related Financial Disclosures said: ‘It's now clearer than ever that failing to take comprehensive action on climate risk is not an option for banks or insurers. The PRA's supervisory expectations reflect the fact that this is a top and emerging risk issue for firms and the wider financial system, and needs to be managed accordingly.

‘Board members will be increasingly expected to anticipate how climate-related risks are likely to impact their businesses and to ensure accountability throughout the organisation. Last September’s TCFD Status Report showed that many boards are not sufficiently equipped to ask the right questions of senior management on climate risk.

‘It's encouraging to see some banks and insurers committing to decarbonisation, but this is only a first step. Climate-related risks are complex and could crystallise across multiple business lines across organisations. The PRA is right to expect firms to take a holistic approach in identifying and managing these types of risks.’

PRA Policy Statement | PS11/19 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change

PRA Supervisory statement SS3/19 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change

Report by Pat Sweet

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