The Bank of England (BoE) wants boards of financial services firms to take a stronger role in identifying and managing financial risks caused by climate change by making individual executives accountable and improving disclosure.
The Prudential Regulation Authority (PRA), the financial regulator that is overseen by the U.K.’s central bank, wants firms to improve their long-term approaches to managing the potential financial fallout from climate change-related risks to their operations.
The BoE wants banks to analyse the financial impact of climate-related risks more effectively, such as what impact a flood plain might have on their mortgage portfolio, in the way that insurers already do.
In a “supervisory statement” to all U.K. insurers, banks, building societies, and PRA-designated investment firms, the BoE sets out its expectations on a range of key issues:
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, underlining that the regulator does not want to be “prescriptive” about how firms comply.
The consultation period ends on 15 January 2019.
The Bank’s action comes at a time when financial regulators around the world are debating how they can best address the systemic risks posed by climate change.
On 12 October, some 18 central banks, including those of the United Kingdom, Germany, France, Japan, and China (but not the U.S. Federal Reserve) warned that the financial risks of climate change were “system-wide and potentially irreversible if not addressed.”
In September, a survey by the BoE revealed that only 10 percent of banks were taking a long enough view of climate-related risks: On average, the banks questioned were found to have a four-year planning horizon.
The same survey also found that 30 percent of banks still only consider climate change as a corporate social responsibility issue.
Separately, the Financial Conduct Authority (FCA) has also published a discussion paper setting out its approach to climate change and green finance.
The discussion paper seeks input on areas in which the FCA considers a greater regulatory focus is warranted, such as ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change, and introduces a new requirement for financial services firms to report publicly on how they manage climate risks.