On October 15, 2018, the U.K. PRA published a consultation paper on a draft Supervisory Statement on managing the financial risks from climate change. The consultation follows the PRA's publication in September 2018 of its report "Transition in thinking: The impact of climate change on the U.K. banking sector." The consultation paper is relevant to banks, insurers, re-insurers, building societies and PRA- designated investment firms. The PRA wants firms to take a strategic approach to financial risks from climate change by taking into account current and credible risks and identifying actions needed now to mitigate existing and future risks.
The draft Supervisory Statement states that the PRA expects a firm's response to the financial risks from climate change to be proportionate to the nature, scale and complexity of its business. The draft Supervisory Statement sets out the PRA's expectations on how firms:
- Embed into their governance arrangements the consideration of financial risks from climate change, including by identifying and allocating responsibility for managing financial risks from climate change to relevant Senior Manager Functions;
- Address financial risks from climate change in their existing risk management frameworks and evidence this in their risk management policies, management information and board risk reports;
- Use long-term scenario analysis to inform their strategic planning, risk assessment and risk identification and how the scenario analysis should address a range of outcomes relating to different transition paths to a low carbon economy; and
- Should consider whether additional disclosures are required to improve the transparency of the firm's approach to financial risks from climate change and whether to take into account the recommendations of the Task Force on Climate-related Financial Disclosure.
The PRA and the FCA will establish a Climate Financial Risk Forum by the end of November 2018. The Forum will comprise representatives from industry, technical experts and other stakeholders and will aim to encourage financial sector approaches to managing the financial risks from climate change as well as support green finance.
The FCA has published a Discussion Paper on climate change and green finance, asking for views on potential changes to its regulatory approach to these issues and setting out specific action that the FCA intends to take in the short term in four focus areas—capital markets disclosures, public reporting requirements, green finance and pensions.
The PRA's consultation closes on January 15, 2019.
The PRA's consultation paper is available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2018/cp2318.pdf and details of the PRA's report on climate change and the U.K. banking sector is available at: https://finreg.shearman.com/prudential-regulator-reports-on-climate-related-f.
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