The Bank of England is preparing to release a new set of rules on how it expects re/insurers and banks to manage the financial risks from climate change, according to Governor Mark Carney.
In a statement on Thursday, Carney acknowledged that “insurers and reinsurers are on the front line of managing the physical risks from climate change,” but said that companies need to go further in their long-term plans.
The new rules, due to be published by the Prudential Regulation Authority (PRA), will require re/insurers to “embed fully the consideration of climate risks into governance frameworks, including at board level, and assign responsibility for oversight of these risks to specific senior role holders.”
They will also promote further climate considerations in risk management practices, the regular use of scenario analysis to test resilience, and minimum standards for the disclosure of climate risks.
“The PRA has found that despite the sophistication of insurers in modelling climate risks, there are still gaps in their own risk management,” Carney said.
“The PRA is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side.”
Accordingly, next month the PRA will ask UK insurers to consider how their businesses would be affected in different physical and transition risks scenarios as part of a market-wide insurance stress test.
While governments will ultimately continue to set environmental rules, financial regulators have a key role to play in encouraging firms to implement long-term climate plans and facilitating the flow of investment into green technologies, Carney said.
“Financial policymakers will not drive the transition to a low-carbon economy. Governments will establish the climate policy frameworks, and the private sector will make the necessary investments,” he explained.
“Nonetheless, financial policymakers do have a clear interest in ensuring the financial system is resilient to any transition hastened by those decisions. Our role is to develop the frameworks for markets to adjust efficiently.”
The Governor noted that many firms had welcomed the stricter regulation and were even pushing for more prescriptive recommendations and mandatory disclosures related to climate risk.
