April 15, 2019

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix). PS11/19 also provides feedback to responses to the consultation paper (CP23/18) on banks’ and insurers’ approaches to managing the financial risks from climate change. Additionally, PRA published a speech by Sarah Breeden, Executive Director for International Banks Supervision at PRA, on how the financial risks from climate change are far-reaching, foreseeable, and require immediate action.

PS11/19 is relevant to all UK insurance and reinsurance firms and groups within the scope of Solvency II and non-Solvency II firms (collectively referred to as insurers), banks, building societies, and PRA-designated investment firms. The comment period for the consultation on climate change risks (CP23/18) ended on January 15, 2019. PRA had received 54 responses and the respondents generally welcomed the proposals in CP23/18. In addition to some respondents urging PRA to move more quickly and decisively on climate change issues, there were a number of requests for clarification. Feedback to these responses has been set out in Chapter 2 of PS11/19. After considering the comments received, PRA has made the following changes to the expectations in the SS3/19:

  • Provided more clarity on the timescales appropriate for scenario analysis
  • Updated the wording of the disclosure expectations in response to requests for clarification
  • Clarified that financial positions related to climate vulnerable assets cannot always be hedged; thus, firms should not rely on that assumption

SS3/19 describes the two risk factors through which financial risks from climate change arise and the distinctive elements which, when considered together, present unique challenges and require a strategic approach. Chapter 3 of SS3/19 sets out the PRA expectations concerning this strategic approach. The expectations in SS3/19 take effect on publication of this PS11/19. PRA expects firms to have an initial plan in place to address the expectations and submit an updated Senior Management Function (SMF) form by October 15, 2019. However, firms should note that expectations on firms and SMF holder(s) will take into consideration the evolving understanding of what best practice looks like. PRA intends to publish more detailed expectations in due course.

PRA and FCA have established the Climate Financial Risk Forum (CFRF), with the aim of supporting the integration of climate-related factors into financial decision making, for example, by developing analytical tools and techniques. The policy set out in PS11/19 has been designed in the context of the existing U.K. and EU regulatory framework. PRA has assessed that the policy will not be affected in the event that UK leaves EU with no implementation period in place.

 

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Effective Date: April 15, 2019 (SS3/19)

Keywords: Europe, UK, Banking, Insurance, Climate Change Risks, PS11/19, CP23/18, SS3/19, PRA

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