The UK’s Prudential Regulation Authority (PRA) has outlined how it expects insurers to manage financial risks arising from climate change.
Firms are enhancing their approaches to managing these risks, but more need to take a forward-looking, strategic approach if financial risks are to be minimised, said the PRA in a statement.
The regulator described climate risks as foreseeable and far-reaching, affecting multiple sectors, companies and geographies, and can lead to non-linear, irreversible effects.
In a draft supervisory statement published today (15 October) the PRA proposed firms embed the management of financial risk from climate change in four areas:
Governance – There should be clear board-level responsibility for managing financial risks from climate change and relevant senior management function holders should be identified.
Risk management – Risks should be addressed through firms’ existing risk management frameworks, in line with their board-approved risk appetite, while recognising the nature of financial risks from climate change requires strategic approach.
Scenario analysis – Firms should conduct scenario analysis to inform strategic planning and determine the impact of the financial risks from climate change on business strategy.
Disclosure – Firms should develop an approach to disclosing climate-related financial risks. This includes engaging with wider initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD).
The supervisory statement sets out high-level guidance, but more policy proposals are expected to emerge in the coming years.
It is understood that the PRA will issue further guidance on best practice 12-18 months after the supervisory statement has been finalised, and will continue to look at disclosure as part of the wider debate.
InsuranceERM understands that disclosure requirements may become mandatory in two to three years’ time. The PRA may consider a capital add-on if insurers are not managing their climate risks properly.
The consultation closes on 15 January 2019.
Link to draft supervisory statement: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2018/cp2318.pdf
FCA discussion paper on climate change
The Financial Conduct Authority (FCA) welcomed the PRA consultation on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.
Coinciding with the PRA consultation, it published a discussion paper on Monday seeking input on four areas in which the FCA considers a greater regulatory focus is warranted:
- climate change and pensions – ensuring that those making investment decisions take account of risks including climate change
- enabling competition and market growth for green finance
- ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change
- the scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks
The FCA said it and the PRA have been working closely together to develop a joined-up approach to enhance the resilience of the UK financial system to climate change.
Climate Financial Risk Forum
To co-ordinate action and share best practice, the PRA and FCA are setting up a Climate Financial Risk Forum.
The Forum will involve representatives from industry as well as technical experts and other stakeholders. The PRA and FCA expect to finalise membership of the forum by the end of November, having its first meeting in early 2019.
- InsuranceERM and Environmental Finance are hosting the second annual Insurance & Climate Risk EMEA conference, taking place on 3 December 2018 in London.
For more information and to register see: https://www.insuranceerm.com/content/events/insurance-and-climate-risk-emea.html