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 closes 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.