The Climate Financial Risk Forum (CFRF), which is a joint climate risk forum of FCA and PRA, published a guide written by the industry for the industry to help firms approach and address climate-related financial risks. The guide, the first of its kind, provides practical recommendations to firms of all sizes on disclosure of climate-related financial risks, effective risk management, scenario analysis, and opportunities for innovation in the interest of consumers. The guide is intended to help firms understand the risks that arise from climate change and to provide support on how to integrate these risks into strategy and decision-making processes. Each chapter within the guide provides practical tools, experience, knowledge, and case studies, which firms can use as they develop their strategies, processes, and approaches. An update on the forward-looking work and future outputs of CFRF will be provided later in 2020.
The guide aims to build capacity and share best practices across financial regulators and industry. It recognizes that firms of different sizes, or of differing levels of expertise and experience may take different approaches in considering climate-related financial risks. The working groups recognize that embedding climate risk management is a multi-year endeavor and the guide indicates where firms can make a start and then develop their approach over subsequent years. The guide contains chapters that cover the following aspects of the management of climate-related financial risks:
- Risk management. The guide outlines recommendations from the Working Group, including how firms can approach designing and implementing a governance approach for climate risks akin to the one used for established financial risks, while addressing climate risk-specific nuances. It discusses how firms can decide whether to treat climate risk as a standalone or as a cross-cutting risk and then integrate climate risk into existing risk management frameworks, recognizing how the linkages between climate risk and established risk types may be identified and understood. By appropriately embedding climate-related financial risk into its governance and risk management processes, a firm can make informed business decisions and improve their resilience. The chapter on risk management should be read in conjunction with SS3/19, which presents the FCA requirements for solo-regulated firms, including consideration of how external factors can impact on strategy and viability, as discussed in CP19/20 and in the Scenario Analysis and Disclosure chapters.
- Scenario analysis. The chapter on scenario analysis presents a practical guide outlining leading practices and case studies on how to use scenario analysis to assess climate-related financial risks to inform the strategy, risk management, and business decisions of a firm. By appropriately modeling and considering a range of possible scenarios, a firm can better understand and manage future risks today, while capturing opportunities to support the transition to a net-zero carbon economy. This chapter should be read in conjunction with SS3/19 and with outputs of the PRA's 2021 Biennial Exploratory Scenario (BES); the FCA’s requirements for solo-regulated firms, including CP19/20 and requirements around scenario analysis in the Prudential sourcebook for investment firms (IFPRU); and the Network for Greening the Financial System (NGFS)’s publication on scenario analysis and reference scenarios
- Disclosures. The chapter on disclosures contains practical recommendations for financial institutions wishing to meet good practice expectations for public climate-related financial disclosures. It draws on good practice examples from industry as well as guidelines set by relevant and respected industry bodies, including the recommendations of the Taskforce for Climate related Financial Disclosures (TCFD). By making effective climate-related financial disclosures, a firm can improve transparency, thus helping the market to appropriately assess the true future value of assets.
- Innovation. The chapter on innovation contains recommendations for how financial institutions and other stakeholders can start to deliver a step-change in aligning private-sector financial flows with climate goals, drawing on examples of good industry practices. By developing novel products, services, policies, and approaches, a firm can adapt its business to respond to the potential impact of climate change, benefit consumers, and deliver the change required to meet climate goals.
The CFRF will maintain relevance and leverage lessons learned by the industry by continuing to deliver new material on topics that progress the management of climate-related financial risks and opportunities. CFRF will continue to reach out to get wider views on the issues that firms face and areas where the recommendations could be adapted to make them more practical and usable. These insights will feed into the ongoing work of CFRF, which is currently planning the agenda for its second year. The guide complements wider work from PRA and FCA in this space. This includes PRA’s supervisory expectations for banks’ and insurers’ approaches to managing financial risks from climate change as well as FCA’s proposals to improve issuers’ climate risk disclosures by applying recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).
Keywords: Europe, UK, Banking, Insurance, Securities, Climate Change Risk, TCFD, ESG, Climate Financial Risk Forum, Guidance, Disclosures, Scenario Analysis, PRA, FCA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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