Regulators and central banks already expect financial firms to demonstrate they are effectively managing the risks related to climate change.
And while banks are responding, they may need to quicken the pace. A Prudential Regulation Authority (PRA) survey found that while a majority of banks have begun addressing climate risks as financial risks, those which they anticipate tend to be pushed beyond their typical four-year planning horizon.
Banks and regulators may benefit from teaming together to recalibrate capital and risk models so they align better with climate change and the related mitigation policies. To get there, banks should develop a nuanced understanding of their balance sheet exposure to climate-related risks. Regulators, for their part, should promote greater clarity around the treatment of environmental exposures.
The PRA published a Supervisory Statement (SS3/19) to enhance and align banks' and insurers' approaches to managing the financial risks of climate change.
- It emphasized firms should adopt a strategic response to the unique challenges arising from climate change
- It advised them to incorporate climate risks into their risk management frameworks, policies and procedures
- It encouraged them to build risk into key management information to support effective monitoring, management and oversight