The UK’s Prudential Regulation Authority (PRA) has released a consultation paper calling on the country’s financial services entities to take a more forward looking and strategic approach to the management of financial risks from climate change.
The consultation paper is on a draft supervisory statement which sets out firms’ expectations regarding the management of financial risks driven by climate change, and which is relevant to all UK insurers, banks, building societies, and PRA-designated investment firms.
The PRA notes that climate change and the response of society to it results in financial risks that are relevant to its goal of ensuring safety and soundness. The PRA stresses that these risks are becoming apparent now, and states that while companies are enhancing their approaches to managing these risks, more need to “take a forward-looking, strategic approach if financial risks are to be minimised.”
With this in mind, the supervisory statement proposes a number of expectations in respect of the embedding of firm’s management of financial risks driven by climate change in various areas.
The areas outlined by the PRA include governance – the fact their should be a clear board-level engagement and responsibility for managing the risks; risk management – the PRA states that risks should be assessed through a company’s existing risk management frameworks; scenario analysis – which should be completed to inform a company’s strategic planning and to determine the impact of the risks; and disclosure – the PRA calls on companies to consider the relevance of disclosing information on how the management of financial risks from climate change are integrated into risk management processes.
The PRA states that it will embed the above expectations into its current supervisory framework, adding that it expects companies’ responses to be proportionate to the nature, scale and also complexity of their businesses.
Jon Williams, PwC Partner and FSB Taskforce on Climate-related Financial Disclosures member, commented on the PRA’s supervisory statement on climate change: “In today’s Supervisory Statement, the PRA demonstrates it’s serious about addressing the risks from climate change that threaten the financial stability of banks and insurers.
“The proposed requirement for Boards to better understand financial risks from climate change, including the requirement to appoint a Senior Manager with responsibility for managing climate risks, will help ensure firms have the right skills and level of oversight needed to respond to this complex problem. Having fully-engaged Board members and the right governance structures in place are essential if firms are to take the long-term, strategic approach required.”
“It’s encouraging that some banks and insurers are now taking climate-related financial risks seriously, but there’s still lots of progress to be made to ensure resilience through the transition to a lower-carbon economy. The PRA’s own survey shows that whilst 70% of banks see climate change as a financial risk, only 10% of them are managing these risks comprehensively.
“The TCFD status report, published last month, also shows that the majority of banks are not disclosing on climate governance and find it challenging to integrate climate change into business strategy and risk management. Given the Intergovernmental Panel on Climate Change’s (IPCC) recent report on the impacts of global warming and the urgency of reducing carbon emissions, it’s vital that financial institutions both better manage the risks and benefit from the opportunities that addressing climate change will bring.
“The PRA recognises the importance of improving transparency through climate risk disclosures to help make markets more efficient, and economies more stable and resilient. We hope many will consider adopting the framework proposed by the TCFD to provide consistent and comparable ‘decision-useful’ information across the industry.”
