The Prudential Regulation Authority (PRA) is to launch a consultation on banks’ governance, strategy and risk management in responding to the financial risks from climate change, after a survey found only one in ten are taking a long term strategic view on the issues
The regulator’s survey of 90% of the UK banking sector representing over £11 trillion in assets found that 70% of banks recognise that climate change poses financial risks.
These firms have begun considering the most immediate physical risks to their business models - for example the exposure to mortgages on homes that are at risk of flooding, or the exposure of their investment in countries that could be impacted by extreme weather events.
They have also started to assess how the transition to a low-carbon economy, driven for example by government policy and technological change, may impact the business models of the companies that banks are exposed to.
However, analysis showed only 10% manage these risks comprehensively and take a long-term strategic view of the risks, while almost a third (30%) of banks still only consider climate change as a corporate social responsibility issue.
The report finds that physical and transition risks from climate change have financial risk implications, some of which are already materialising. The PRA says this reality will require more banks to move into the 10% category of strategic oversight.
Whilst what it terms ‘a transition in thinking’ is taking place, the PRA will publish a consultation on its supervisory expectations for banks and insurers. These expectations will centre on firms’ governance, strategy and risk management in responding to the financial risks from climate change, including the extent to which boards are considering strategically the distinct nature of these risks and the unique challenges they present.
To help consider climate-related financial risks, to share best practice and provide intellectual leadership in this emerging field, the PRA is also announcing a new climate financial risk forum with the Financial Conduct Authority (FCA), involving private sector participants, technical experts and relevant stakeholders.
The Bank of England’s financial policy committee will also consider the system-wide financial risks from climate change and will explore whether climate-related factors should be included in a future biennial exploratory scenarios (BES) stress test.
Transition in thinking: The impact of climate change on the UK banking sector is here
Report by Pat Sweet
