The Bank of England (BoE) announced today a series of proposals strengthening its expectations for banks’ and insurers’ management of climate-related risks, after finding that while improvements in this area have been made over the past few years, “progress is uneven and more needs to be done.”
The new proposals would update the BoE’s initial 2019 supervisory expectations for firms’ management of climate-related risks, Supervisory Statement 3/19. The central bank signaled last year that it would begin work on updating the expectations, based on its learnings over the past five years.
According to the BoE’s Prudential Regulatory Authority (PRA), its review indicated that while “firms have made progress, their capabilities to identify and manage climate-related risk are still at an early stage,” with the regulator adding that banks’ frameworks for climate-related risk management “are still in their infancy.”
The PRA noted that most banks have yet to establish climate-related risk metrics or to define a “climate-specific risk appetite,” adding that “many firms do not currently consider climate-related risk to be a material risk, yet this conclusion is not based on an adequate assessment of climate-related risk exposures.”
For insurers, the PRA said that while most have “embedded some form of climate-related risk within their risk appetite statement,” it noted that risk management processes are still at early stages of development, adding that “current metrics often do not directly quantify climate-related financial risks and, therefore, do not allow insurers to measure and monitor their climate exposures against risk appetite.”
Among the key proposals introduced by the BoE is the placement of a greater emphasis on scenario analysis, with firms encouraged to enhance their scenario analysis capabilities, and to demonstrate understanding of the outputs of the scenarios and their use of the information to assess exposure to climate-related risks and to inform their decision-making.
The proposals also include expectations for firms to identify and assess data gaps that act as barriers to management of climate-related risks, and to have in place plans to manage and close the gaps, as well as to improve oversight and controls on the use of data from external providers.
Additionally, the proposals set expectations for banks and insurers to more formally assess their climate-related risk appetites, including ensuring that boards periodically review risk appetite, climate-related risk management practices and strategy, and that firms’ management should demonstrate how the risk appetite and strategy relate to developments in climate-related risks to their business models.
The central bank launched a consultation on the new proposals, which will remain open until July 30, 2025.
In a speech announcing the launch of the consultation, David Bailey, Executive Director of Prudential Policy at the BoE, said:
“Effective risk management at firms will help create a more resilient financial system that can withstand the increase in the frequency and severity of climate events that we are experiencing and any changes in the transition pathway. This is essential for supporting both the sustainable growth and the competitiveness of the UK economy over the medium to long term.”
Click here to access the consultation paper.
