PRA consults on updated supervisory expectations to manage climate-related risks

The Prudential Regulation Authority (PRA) has issued a consultation paper (CP10/25) and draft updates to the supervisory statement 3/19. The consultation aims to enhance supervisory expectations on the management of climate-related risks by banks and insurers due to the growing impact of climate change. This consultation was also announced in a speech given by David Bailey, Executive Director of Prudential Policy at the BoE, at the Climate Financial Risk Forum. The proposals cover:

• Governance. Enhancing existing governance expectations in SS3/9, clarifying the applications of these policies for climate-related risk and emphasising the board's responsibility to set and own the overall business risk appetite for climate. The proposals include new expectations to ensure alignment between a firm's strategy and meeting its own climate targets that have been adopted, and on setting the internal controls environment.
• Risk management. Introducing clearer expectations for each element of the risk management framework and clarifying how existing PRA policies should be applied to climate-related risk. They aim to ensure firms use a structured approach by developing appropriate metrics and limits for monitoring and management of these risks. The proposals also aim to ensure that the board and management body are provided with appropriate, decision-useful risk reporting.
• Climate scenario analysis (CSA). Enhancing the supervisory expectations in relation to CSA given the uncertainty of future climate-related outcomes. This risk assessment tool supplements the standard scenario analysis and stress testing toolkit used by firms and will help to effectively account for specific characteristics of climate-related risks.
• Data. With data gaps remaining a significant challenge in firms' management of climate-related risks, the proposals aim to help firms explain how they identify and assess these gaps, quantify the resulting uncertainty and incorporate this into their risk appetite and management tools.
• Disclosures. No substantive changes to the expectations on disclosures in SS3/19 will be made apart from proposals to add references to the UK sustainability reporting standards.

The deadline for comments to the consultation is 30 July.

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