It’s little more than a week since the Intergovernmental Panel on Climate Change shook the world with its urgent message on global warming. And now comes the turn of financial regulators to ensure banks and insurance companies are safeguarding their businesses against the threat from rising temperatures.

The Bank of England this week told institutions they need to have “credible” plans or policies in place to manage exposures to climate change.

There was also a direct appeal to boardrooms who were told they will be expected to “understand and assess the financial risks” inherent in climate change.

This will include identifying clear roles and responsibilities for board members and relevant sub-committees. Most importantly, the Bank’s watchdog, the Prudential Regulation Authority (PRA), demands to know which senior manager is in charge of supervising the process of dealing with climate change risk.

The PRA will also launch a new body—the Climate Financial Risk Forum—to help map out best practice on confronting climate-related financial risk.

Front line

The Association of British Insurers (ABI), a professional body for insurance companies, acknowledged that its members were on the front line of climate change and were already working on many fronts. “We’re keen to contribute to the PRA’s consultation on this topic, and to get involved in the new Climate Financial Risk Forum…,” the ABI said.

Meanwhile UK Finance, the professional body that represents British bankers, said it too was set to “liaise closely” with the Bank of England. “Many within financial services recognise the need to anticipate and manage this transition. This is evidenced by the commitment made to act upon the recommendations of the FSB-sponsored Taskforce on Climate-related Financial Disclosures,” said UK Finance.

The PRA’s proposals stem from a desire to see more financial firms getting to grips with climate change, a call that appears in tune with the IPCC’s calls for governments to accelerate their climate policies if the world is to restrict warming to no more than 1.5℃ above pre-industrial levels. Worryingly, according to the PRA, too few firms are currently getting their strategic minds around the climate challenge. It says more firms need to take a “strategic” approach.

“Climate change and society’s response to it presents financial risks that are relevant to the PRA’s objectives of safety and soundness,” said the PRA.

“Whilst these risks may crystallise in full over longer time horizons, they are becoming apparent now. 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.”

Implications

The consultation outlines why the Bank of England is pressing financial firms to grapple with the implications of global warming, a list that makes for a chilling read:

• 2017 saw the highest year on record for global insured losses arising from natural disasters;
• Weather-related “natural hazard loss events” have tripled since the 1980s;
• Annual losses have grown from around $10bn in the 1980s to $55bn over the past decade;
• UK sea levels are due to rise 21–28cm by 2080;
• The 2011 Thai floods were notable not only for the challenges and tragedy they presented to locals but also because of the disruption they caused to global supply chains.

As well as the identification of board-level roles, the PRA “expects firms to evidence how they will mitigate these financial risks and to have a credible plan or policies in place for managing exposures.”

There are also clear demands about information fed to boards: “The PRA expects firms to provide the board and relevant sub-committees with management information on their exposure to the financial risks from climate change and the mitigating actions the firm proposes to take. The management information should enable the board to discuss, challenge, and take decisions relating to the firm’s management of the financial risks from climate change.”

But it also wants boards to oversee scenario analysis to “inform their strategic planning.” This demand is poignant. When the TCFD (the Task Force on Climate-Related Financial Disclosures,  a G20 offshoot) recently reported on the use among corporates of its own voluntary guidelines for reporting climate-related risk, one of its key disappointments was the lack of scenario analysis so far evident in company reports.

The PRA makes another interesting call. Companies are already required under law to disclose significant risks. Many argue that some companies have overlooked their duties by failing to disclose climate risk. The PRA asks companies to consider their reporting duties and then consider if they should go further.

Currently the proposals from the PRA form a consultation document. But if nothing else, the PRA has left at least one sector of the UK economy in little doubt of its responsibilities.