September 26, 2018

PRA published a report that examines the financial risks from climate change that impact UK banks, building societies, and PRA-designated investment firms. The report also assesses how banks are responding to these and clarifies the supervisory approach of PRA. The report finds that physical and transition risks from climate change have financial risk implications, some of which are materializing; this will require more banks to move into the category of strategic oversight. Physical and transition risks materialize into increasing credit, market, and operational risks that can impact the safety and soundness of the UK banking sector.

The report sets out the background and context on the two primary climate-related risk factors—that is, physical and transition. This includes findings from the climate science community and background on the low-carbon transition. The report then examines the financial risks from climate change that impact on the UK banking sector. This includes four specific case studies demonstrating how these risks are becoming relevant to the PRA-regulated banks. It also discusses the distinctive elements of financial risks and how they may evolve. Additionally, the report assesses how banks are responding to and managing the financial risks from climate change through their governance and risk management frameworks. It does this through the lens of the PRA supervisory framework and discusses the transition in thinking observed within the banking sector in its approach to these issues. 

A survey of 90% of the UK banking sector, representing over EUR 11 trillion in assets, found that 70% of the banks recognize that climate change poses financial risks. Only 10% manage these risks comprehensively and take a long-term strategic view of the risks. Thirty percent of banks still only consider climate change as a corporate social responsibility issue. With foresight, these climate-related financial risks can be managed in an orderly, effective, and productive manner. While a transition in thinking is taking place, PRA will publish a consultation on its supervisory expectations for banks and insurers. To help consider climate-related financial risks, to share best practice, and to provide intellectual leadership in this emerging field, PRA is also announcing a new Climate Financial Risk Forum with FCA, involving private-sector participants, technical experts, and relevant stakeholders.

The Financial Policy Committee will also consider the system-wide financial risks from climate change and will explore whether climate-related factors should be included in a future Biennial Exploratory Scenarios (BES) stress test. BoE is also engaging closely with other central banks and financial regulators, both domestically and internationally.

 

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Keywords: Europe, UK, Banking, Climate Related Risks, Climate Change Risks, BoE, PRA

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