Insurers and banks need to take a strategic approach in managing the financial risks arising from climate change, says the Bank of England (BoE).
The central bank’s Prudential Regulation Authority (PRA) is seeking feedback on a proposal that sets out expectations regarding firms’ approaches to managing the financial risks from climate change. It is relevant to all UK insurance and reinsurance firms, banks, building societies and PRA-designated investment firms.
“Climate change and society’s response to it presents financial risks that are relevant to the PRA’s objectives of safety and soundness,” it noted. “While these risks may crystallize in full over longer-time horizons, they are becoming apparent now.”
The BoE proposes that firms address risks through their 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.”
Other proposed expectations include how firms should:
- Embed the consideration of the financial risks from climate change in their governance arrangements;
- 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 consultation closes on January 15, 2019.