17th October 2018

PRA and FCA consults on expectations for the management of financial risks from climate change

The Prudential Regulatory Authority(PRA) has published a consultation paper on a draft supervisory statement(SS) which sets out expectations regarding firms’ approaches to managing the financial risks from climate change. These centre on how managing the far-reaching and foreseeable risks from climate change requires a strategic approach
which considers how actions today affect future financial risks. The supervisory statement is relevant to all
UK insurers, banks, building societies and PRA-designated investment firms.
Climate change and society’s response to it presents financial risks that are relevant to the PRA’s objectives
of safety and soundness. Whilst these risks may crystallise in full over longer-time horizons, they are becoming apparent now. Firms are enhancing their approaches to managing these risks, but more need to take a forward-looking, strategic approach if financial risks are to be minimised.
With this context, the SS sets out proposed expectations in respect of the embedding of firm’s management of financial risks arising from climate risk in a number of areas:
-Governance: There should be clear board-level engagement and responsibility for managing the financial risks from climate change. This includes identifying the relevant Senior Management Function (SMF) holder(s);
-Risk Management: Risks should be addressed through firms’ existing risk management frameworks, in line with their board-approved risk appetite, while recognising that the nature of financial risks from climate change requires a strategic approach;
-Scenario analysis: This should be conducted (where proportionate) to inform a firm’s strategic planning
and determine the impact of the financial risks from climate change on its overall business strategy;
-Disclosure: Firms should consider the relevance of disclosing information on how financial risks from
climate change are integrated into governance and risk management processes. This includes firms engaging with the wider initiatives on climate-related financial disclosures, such as the Task Force on Climate-related Financial Disclosures(TFCD).
The PRA will embed these expectations into its existing supervisory framework and expects firms’ responses
to be proportionate to the nature, scale and complexity of their respective businesses.
The Financial Conduct Authority (FCA) has also today published a discussion paper setting out its approach
to climate change and green finance. THe PRA welcomes this report and looks forward to engaging with the FCA in
the Climate Financial Risk Forum.
The consultation period ends on 15th January 2019.
The FCA says that the effects of climate change and the associated transition to a low carbon economy may have a major impact on financial markets and on products that serve those markets. Its Discussion Paper sets out how the impacts of climate change are relevant to the FCA’s statutory objectives of protecting consumers, protecting market integrity and promoting competition.
The Discussion Paper seeks input on four areas in which the FCA considers a greater regulatory focus is warranted:
-climate change and pensions–ensuring that those making investment decisions take account of risks including climate change
-enabling competition and market growth for green finance
-ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change
-the scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.
Andrew Bailey, chief executive at the FCA, comments “Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks–at a global, European and UK level–have already begun to adapt to reflect a move to a low carbon economy.
The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way which meets users’ needs.”
The FCA welcomes the PRA's consultation on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. The FCA and PRA have been working closely together to develop a joined-up approach to enhance the resilience of the UK financial system to climate change.
To co-ordinate action and share best practice, the PRA and FCA are setting up a Climate Financial Risk Forum. It is designed to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in Green Finance.
The Forum will involve representatives from industry as well as technical experts and other stakeholders. The PRA and FCA expect to finalise membership of the forum by the end of November, having a first meeting in early 2019.
The FCA is now seeking feedback on the questions set out in this Discussion Paper and would like all those interested in financial services to consider the issues raised in this paper and provide comments by 31st January 2019.

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