Banks and insurers need to improve climate risk management, say UK regulators

UK banks and insurers have made “positive steps” towards managing climate-related financial risks but further progress is needed, a British regulator has found.

The Prudential Regulation Authority (PRA) noted that most firms had made progress in establishing a governance framework for climate risks but consistency in application varied.

All firms need to work on developing risk management tools that consider decision making, while large data gaps also remain that need to be accounted for and explained.

“More robust, standardised climate-related data of sufficient coverage is needed across the financial sector,” the PRA noted in its climate change adaptation report.

While the PRA noted that climate-related capital assessments are “complex and still evolving”, it noted that firms still need to adequately show they have considered climate change risks. Further work is also encouraged on quantifying the impact of climate risk on expected losses.

One of the current goals of the PRA’s parent organisation, the Bank of England (BoE), is to help the UK financial system enhance its resilience and understand the impact that climate change could have on the macroeconomy. Part of that work includes the PRA making sure firms identify, measure, manage and mitigate the climate risks they face.

The PRA plans to update its supervisory expectations and will issue a consultation paper this year on its proposals. Once finalised, a forum will be created to update and build on existing guidance to help financial institutions integrate their climate risk in line with supervisory expectations.

In parallel, the BoE will assess the potential systemic risks posed by climate change.

In a separate report, the Financial Conduct Authority (FCA) noted that the major issues impacting climate change adaptation of financial institutions include data and modelling, barriers to insurance underwriting for climate risks, as well as barriers for allocating capital to adaptation measures.

While financial firms need to adapt their risk assessments, the wider economy needs to adapt to a net-zero economy in order to minimise financial impacts, the FCA stated.

There are clear incentives for financial firms to invest in climate adaptation, but “the issue is making sure they are clearly sighted on where those opportunities and solutions exist, and how they can be successfully delivered”.

Meanwhile, the UK government plans to consult on how adopting the standards set by the International Sustainability Standards Board would work for the country. The government intends to endorse their use but will explore if they should be mandatory, Environmental Finance reported.

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