The PRA is proposing updates to its Supervisory Statement 3/19 on how banks and insurers manage climate-related risks.
The speed of climate change and the widespread adverse impact over recent years can directly affect banks’ and insurers’ ability to support clients – both if they are needing to transition away from fossil fuels, but also where they are exposed to broader transition risks. This may put pressure on the regulated firms’ own commercial resilience as losses crystallise. The risks, whether physical or transition, are systemic and are at the same time uncertain in scale and timing but also foreseeable. Actions taken now can mitigate against the risks of irreversible damage and disruptive transition.
David Bailey, speaking on the launch of the consultation, explained why the BoE had been among the first central banks to create supervisory expectations on how firms manage climate-related risks but now it is time to update the expectations. He stressed that the updated expectations – which are just that, and not rules – are not a change in regulatory direction. Rather, they consolidate guidance since the 2019 statement was published and aligns the UK approach to international standards.
The main change is to place greater emphasis on how firms use scenario analyses – and in order properly to apply these, firms need further to integrate climate risk into their governance frameworks. Firms should also ensure that clear statements of risk appetite, properly understood by senior management, are appropriately cascaded down to individual business lines.
Part and parcel of this is to have transparent, high-quality disclosures.
The PRA appreciates the changes will impose short-term costs on firms, but for firms that have properly kept up to date with developments these should be minimal.
The PRA sees an important role for the Climate Risk Financial Forum, which started in 2019 – it helped firms then to build best practice and has helped since then to guide the sector. The changes now proposed will need more guidance, which is where the CFRF will be important.
Consultation closes on 30 July.