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.
