Featured Product

    PRA Letter Sets Expectations on Approach to Managing Climate Risks

    July 01, 2020

    PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change. The letter was issued by Sam Woods of PRA to the chief executive officers of all regulated firms; it provides thematic feedback from the review of firms’ SS3/19 plans, offers clarification on expectations, presents observations on good practices, and sets out the next steps for implementation of firms' plans. In addition, BoE published a speech by Sarah Breeden, the BoE Executive Director for UK Deposit Takers Supervision, on how the financial sector can draw on the recent work of BoE, Climate Financial Risk Forum (CFRF), and Network for Greening the Financial System (NGFS) to move beyond rhetoric and help make climate action a reality. Additionally, in a recently published statement, the BoE Governor Andrew Bailey mentioned that the COVID-19 crisis has not changed the commitment to the goals of combating adverse effects of climate change but the crisis has required hard decisions to be taken on competing priorities.

    The letter states that, in April 2019, PRA had asked firms to have an implementation plan in place by October 2019 but did not set a date for full implementation. The letter highlights that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. Firms should continue to take a proportionate approach that reflects the exposure of an institution to climate-related financial risk and the complexity of its operations. After reviewing the SS3/19 implementation plans of a large number of firms, PRA has found that most firms are making good progress in developing approaches to identify, assess, manage, report, and disclose climate-related financial risks and have started to embed them in associated governance and control structures. The annex to the letter provides examples of good practices and highlights where there are gaps between firms’ intentions and expectations of PRA. The key highlighted gaps are in the following areas:

    • Governance—Firms’ strategic responses need to be clearer and firms need to continue developing tools that inform business decisions. Climate management information should be communicated more consistently and actively discussed at board level. Firms’ oversight of climate-related financial risks could better demonstrate an appreciation of the far-reaching breadth and magnitude of the risks and a clearer understanding of their relationship to financial risks. This includes a clearer understanding of the physical and transition risk transmission channels and interactions between multiple lines of business, sectors and geographies.
    • Risk Management—Metrics and quantification were identified as the most challenging aspect of assessing climate-related financial risks. PRA recognizes that there are some areas where the science, data or tools are not yet sufficient to estimate the risks accurately. In these cases firms should ensure that identified risks are recognized through the use of reasonable proxies and assumptions.
    • Scenario Analysis—Firms have significant gaps in their capabilities, data, and tools and have not yet integrated scenario analysis into their broader risk assessments. The development of a proportionate and integrated approach to scenario analysis by the end of 2021 will require many firms to increase their capabilities materially in the near-term.
    • Disclosure—Firms’ appetite for making climate disclosures is limited by capabilities and as a result some firms are yet to make any associated disclosures. Capabilities will need to be materially improved to facilitate future disclosures.

    Recently, the Climate Financial Risk Forum, which is co-chaired by PRA and FCA, produced a guide on how to approach climate disclosure, risk management, scenario analysis, and innovation. BoE will also issue additional guidance and useful material such as reference scenarios prior to the launch of the 2021 climate focused Biennial Exploratory Scenario. These steps, alongside the examples of good practices set out in this letter, will assist in meeting supervisory expectations of PRA.

     

    Related Links

    Keywords: Europe, UK, Banking, Insurance, Securities, COVID-19, SS3/19, Governance, Proportionality, Disclosure, ESG, CFRF, NGFS, Climate Change Risk, BoE, PRA, FCA

    Featured Experts
    Related Articles
    News

    EIOPA Report Analyzes Use and Impact of Long-Term Guarantee Measures

    EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.

    December 03, 2020 WebPage Regulatory News
    News

    BIS, SNB, and SIX Announce Successful Completion of CBDC POC

    The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.

    December 03, 2020 WebPage Regulatory News
    News

    EBA Sets Out Treatment of Certain Banking Book Positions Under FRTB

    EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.

    December 03, 2020 WebPage Regulatory News
    News

    EIOPA Consults on Integrating Climate Change into SII Standard Formula

    EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.

    December 02, 2020 WebPage Regulatory News
    News

    EU Issues Corrigenda to Investment Firms Directive and Regulation

    EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.

    December 02, 2020 WebPage Regulatory News
    News

    MAS Proposes Changes to Rules Arising from Banking Amendment Act

    MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.

    December 02, 2020 WebPage Regulatory News
    News

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Aspects of Insurance Act, Solvency Standards & IFRS17

    RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6191