Hot on the heels of the FCA, the PRA has published its Climate Change Adaptation report. This is the PRA’s third report on the subject and focuses on the prudential impact on banks and insurers. Like the FCA, it notes that availability of accurate data is a large issue.
It says firms must take a strategic approach to managing the operational and financial risks from climate change and is continuing to develop its prudential policy. It is generally pleased with what firms have done to date in implementing the expectations it set in 2019 but says the levels of embedding vary and all firms need to do more.
The report looks at both physical and transition risks, including the physical risks of damage to premises of regulated firms and their third party providers, and transition risks such as, for example, where products need to be retired sooner than foreseen because new regulations make them uneconomical.
The report concludes that:
- the risks are systemic affecting everyone, everywhere, and with irreversible impacts;
- the risks are simultaneously uncertain and yet foreseeable; and
- the size and balance of future risks will be determine by actions taken now.
The PRA continues to monitor the impact of climate risk on balance sheets.
Currently, it says that:
- firms have on the whole made substantial progress in developing governance structures for climate risks but consistency of approach could be improved;
- there are significant variations in the maturity of firms’ risk management processes;
- climate scenario analysis knowledge and modelling capabilities have evolved but more could be done;
- data gaps are still an integral part of climate risk that banks need to manage and firms need to plan on how to close those gaps;
- firms’ work on climate related capital assessments is complex and still evolving but firms must still be able to show they are properly considered within current requirements; and
- major banks are developing capabilities to quantify the impact of client risk on expected capital losses.