UK regulator launches consultation on supervision of climate risk

The UK’s Prudential Regulatory Authority (PRA) wants banks and insurers to do more to manage climate risk and is giving them clearer guidelines on what is expected of them, according to new proposals.

The PRA, the part of the Bank of England (BoE) which supervises about 1,500 financial institutions, said companies had asked for more clarity on what it expects them to do to respond to climate change.

“Firms have begun to build their climate-related risk management capabilities. However, progress is uneven and more needs to be done,” the PRA said in its consultation paper.

“The aim is to set out clear, straightforward and concise expectations about climate-related risk identification, management and governance outcomes that the PRA would like to see from firms,” it said.

“At the same time, the proposals continue to provide space for firms to take action and develop innovative solutions that are most suited to their business.”

The PRA said it recognised that this is a challenging area given the uncertain nature of climate-related risks so it wants to work with industry groups to advance best practice.

“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,” David Bailey, BoE executive director for prudential policy, said in a speech to launch the consultation period.

Bailey said the PRA’s updated expectations place greater emphasis on the use of scenario analysis: “Firms will be expected to show a strong understanding of how they will take the outputs from the scenarios they design and construct and use them to actively inform the business decisions they take.”

Bailey also said that the PRA continues to be a strong supporter of the International Sustainability Standards Board and the development of a framework for UK sustainability reporting standards.

Britain’s Labour government has reinstated climate change as an important objective of central bank policy but is sending mixed messages on the centrality of the goal as it seeks to revive growth in the UK economy, experts say.