The PRA issues a new supervisory statement setting out expectations for banks and insurers on managing the financial risks from climate change

The PRA issues a new supervisory statement setting out expectations for banks and insurers on managing the financial risks from climate change

By Laura Canevari and Robin Hamaker-Taylor

On 15th April, 2019, the Prudential Regulation Authority (PRA) has released a supervisory statement relevant to all UK banks and insurance firms and groups. This SS is in alignment with PRA´s commitment to enhancing its approach to supervising the financial risks from climate change and to enhancing the resilience of the UK financial system by supporting an orderly market transition to a low-carbon economy.

Building on previous reviews of current practices in the banking and insurance sector, the PRA finds that few firms are taking a strategic approach toward managing climate related financial risks. For this reason, the new SS has set out clear expectations concerning the strategic approach that banks and insurers should take in relation to financial risks generated by climate change. Four key expectations are outlined in the SS:

  • Governance:
    The PRA expects firms to fully embed the consideration of the financial risks
    from climate change into their governance framework. This includes ensuring board-level
    engagement and accountability, and the designation of clear responsibilities
    for managing the financial risks from climate change at the board level and within
    relevant sub-committees. Additionally, firms are expected to ensure the adequate
    oversight of the risks according to the firm’s business strategy and risk
    appetite.
  • Risk
    Management
    : The PRA expects firms to address
    the financial risks from climate change through their existing risk management
    frameworks, in line with their board-approved risk appetite, while recognising
    that the nature of financial risks from climate change requires a strategic
    approach. Accordingly, firms are expected to identify, measure, monitor,
    manage, and report on their exposure to these risks. Evidence for these
    activities are expected to be provided in the written risk management policy,
    management information and board risk reports.
  • Scenario Analysis: Where proportionate,
    the PRA expects firms to use scenario analysis to assess the impact of the financial
    risks from climate change on current business strategy, and to inform the risk
    identification process. The scenarios used should explore the resilience and vulnerabilities of a firm’s
    business model to a range of outcomes, relating to different transition
    pathways to a low-carbon economy. They should also, where appropriate, include
    a short and a longer-term assessment of financial risks associated with a
    changing climate.
  • Disclosure:
    Firms should develop and maintain an appropriate approach to the disclosure of
    climate-related financial risks, considering not only the interaction with
    existing categories of risk, but also the distinctive elements of the financial
    risks arising from climate change, as described in the supervisory statement.
    These elements are: Impacts are far-reaching in breadth and magnitude; There
    are uncertain and extended time horizons; The risks have a foreseeable nature; There
    is a dependency on short-term actions.

Click here to access the full supervisory statement from the PRA.


Cover photo by Floraine Vita on Unsplash.

 

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