Published on 15 April 2019
Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change - PS11/19
Overview
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 23/18 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. It also contains the final Supervisory Statement (SS) 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (Appendix).
This PS is relevant to all UK insurance and reinsurance firms and groups, ie those within the scope of Solvency II including the Society of Lloyd’s and managing agents (‘Solvency II firms’) and non-Solvency II firms, (collectively referred to as ‘insurers’), banks, building societies, and PRA-designated investment firms (collectively referred to as ‘banks’). ‘Firms’ will be used to refer to both insurers and banks.
Summary of responses
The PRA received 54 responses to the CP. Respondents generally welcomed the PRA’s proposals. Some respondents urged the PRA to move more quickly and decisively on climate change issues. There were also a number of requests for clarification. Feedback to these responses is set out in Chapter 2.
Implementation and next steps
The expectations in SS3/19 take effect on publication of this PS. The PRA expects firms to have an initial plan in place to address the expectations and submit an updated Senior Management Function (SMF) form by Tuesday 15 October 2019. However, firms should note that expectations on firms and SMF holder(s) will take into consideration the evolving understanding of what best practice looks like.
The PRA intends to publish more detailed expectations in due course. The PRA considers that firms’ practices regarding the financial risks from climate change will continue to develop and mature, and the sophistication of firms’ approaches will reflect that. The PRA and Financial Conduct Authority (FCA) have established the Climate Financial Risk Forum (CFRF) to support the integration of climate-related factors into financial decision making, for example by developing analytical tools and techniques. The outputs from the CFRF, supervisory engagement, and the PRA’s international work with the Central Banks and Supervisors Network for Greening the Financial System (NGFS) will inform the PRA’s approach to supervising these expectations and the PRA will keep its climate change policy under review.
The policy set out in this PS has been designed in the context of the current UK and EU regulatory framework. The PRA has assessed that the policy will not be affected in the event that the UK leaves the EU with no implementation period in place.
Policy Statement 11/19Appendix
Published on 15 October 2018
Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change - CP23/18
Overview
In this consultation paper (CP), the Prudential Regulation Authority (PRA) seeks views on a draft supervisory statement (SS) on banks’ and insurers’ approaches to managing the financial risks from climate change (see Appendix).
The CP is relevant to all UK insurance and reinsurance firms and groups, ie those within the scope of Solvency II including the Society of Lloyd’s and managing agents (‘Solvency II firms’) and non-Solvency II firms, (collectively referred to as ‘insurers’), banks, building societies, and PRA-designated investment firms (hereinafter ‘banks’). ‘Firms’ will be used to refer to both insurers and banks.
Background and purpose
The draft SS expands on the PRA’s general approach as set out in its insurance and banking approach documents and draws upon previous work from the Bank of England and PRA on the financial risks from climate change. The draft SS is informed by: recent engagement with the banking and insurance sectors; the PRA’s report ‘Transition in thinking: The impact of climate change on the UK banking sector’ published in September 2018; an exercise carried out by the PRA with the insurance sector between May and July 2018 that built on the findings from the 2015 insurance sector report; and international liaison with other regulatory bodies.
The purpose of these proposals is to set out how effective governance, risk management, scenario analysis, and disclosures may be applied by firms to address the financial risks from climate change.
The draft SS is intended to complement existing policy material and inform compliance with existing requirements in legislation and PRA rules. The PRA’s desired outcome is that firms take a strategic approach to managing the financial risks from climate change, taking into account current risks, those that can plausibly arise in the future, and identifying the actions required today to mitigate current and future financial risks. The draft SS sets out the PRA’s proposed expectations concerning how firms:
- embed the consideration of the financial risks from climate change in their governance arrangements;
- incorporate the financial risks from climate change into existing risk management practice;
- use (long-term) scenario analysis to inform strategy setting and risk assessment and identification; and
- develop an approach to disclosure on the financial risks from climate change.
The PRA considers that setting out its proposed expectations around how firms address the financial risks from climate change will enable firms to interpret the PRA’s rules and facilitate these intended outcomes.
Responses and next steps
This consultation closed on Tuesday 15 January 2019. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP23_18@bankofengland.co.uk.