The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published reports that set out how climate change affects their respective responsibilities and the actions that are being taken in response to it. In its report, FCA set out the steps that have been taken in the industry to mitigate the risks climate change presents and identifies areas, such as retail investments and mortgages, where more needs to be done. The assessment comes within the context of the developing strategic approach to climate change issues.
The FCA report outlines climate change and environmental, social, and governance (ESG) strategy and how it is evolving. It further outlines a timeline of major ESG publications of FCA between now and the Summer of 2022. This includes the publication of final rules on disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations for standard listed issuers, asset managers, life insurers, and FCA-regulated pension funds. It also includes work on the Sustainability Disclosure Requirements and product labeling. The report examines how the industry is making commitments to reach net-zero. FCA is also running a further Green Fintech Challenge, focused on new products and services to speed the transition to a net-zero economy. The report is focused on the climate-related risks that financial services firms are exposed to, including insurance underwriting risk, credit risk, financial market risk, and operational risk. The report also outlines the role of capital mobilization in financing both climate change adaptation and climate change mitigation
The PRA report sets out response to the risks posed by climate change to its operations and policy functions in two parts. Part A of the report examines the risks posed by climate change to PRA-regulated firms, the progress they have made in their management of these risks, what the PRA response to these risks has been, and the PRA supervisory strategy from 2022. In 2022, PRA will switch its supervisory approach on the climate-related supervisory expectations from one of assessing implementation to actively supervising against them. While challenges arising from issues such as data gaps persist, firms should use their judgment, expertise, and the tools available to them, to demonstrate understanding and management of the risks posed by climate change to their businesses. This approach will then need to evolve, as industry-wide understanding of climate-related financial risks, data, tools, and best practices continue to develop. As climate change becomes part of the core supervisory approach, firms should expect to demonstrate effective management of climate-related financial risks through regular supervisory engagements and reviews. Where progress is insufficient and assurance or remediation is needed, PRA will request clear plans and, where appropriate, consider exercise of its powers and use of its wider supervisory toolkit.
Part B of the PRA report examines the relationship between climate change and the banking and insurance regulatory capital regimes, whether there are gaps that should be addressed, and the PRA’s planned future work in this space. Capital is a key part of the supervisory and regulatory toolkit of PRA. While PRA observes that it is not the right tool to address the underlying causes of climate change (greenhouse gas emissions), it should help provide resilience against its consequences (financial risks). PRA already expects firms to hold capital against material climate-related financial risks, but in light of the report’s findings, PRA will be undertaking further work. This work will help determine whether changes to the design, use or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks. PRA will provide an update on its approach in 2022 following a call for further research and a conference on climate change and capital requirements.
Keywords: Europe, UK, Banking, Securities, Climate Change Risk, ESG, Climate Change Adaption, Regulatory Capital, 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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The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
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The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
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The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
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The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
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