UK Prudential Regulator Publishes Statements on Managing Climate Change Risks

The U.K. Prudential Regulation Authority has published a Policy Statement and related Supervisory Statement on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. The statements are in response to the PRA’s consultation paper published in 2018 which sought feedback on the draft Supervisory Statement. The Statements are relevant to all U.K. insurance and reinsurance firms, banks, building societies and PRA-designated investment firms. The expectations under the Supervisory Statement take effect on April 15, 2019 and firms are expected to have an initial plan in place to address the expectations and submit an updated Senior Management Function form by October 15, 2019.

The Policy Statement contains details of the responses the PRA received to its consultation paper, covering the PRA’s proposals on governance, risk management, scenario analysis, and disclosure. In light of the feedback it received, the PRA has made the following changes to the expectations in the Supervisory Statement: (i) greater clarity on the appropriate timescales for scenario analysis; (ii) updated wording for disclosure expectations; and (iii) clarification that financial positions related to climate vulnerable assets cannot always be hedged, so firms should not rely on that assumption.

The Supervisory Statement notes that climate change is expected to pose physical risks (through the increasing severity and frequency of climate events) and transition risks (through economic adjustments made to manage climate change) to the financial system. The PRA also notes the existence of legal risk arising from claims made by parties who have suffered losses through physical and transition risk. Its expectations on firms’ strategic approaches to managing these financial risks include:
 

• Governance – firms’ boards should understand and assess climate-related financial risks and be able to address and oversee them;
• Risk management – firms’ boards should address climate-related financial risks through risk management frameworks;
• Scenario analysis – firms should employ scenario analysis where proportionate to test their risk profile and inform strategic planning;
• Disclosure – firms should consider whether to make climate-related disclosures in addition to their existing disclosure regimes.

View the PRA's Policy Statement.

View the PRA's Supervisory Statement. 

View details of the PRA's Consultation Paper.

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