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PRA and FCA joint forum publishes guidance to all firms on climate-related financial risks

30 June 2020. Published by Edward Colville, Partner

On 29 June 2020, the Climate Financial Risk Forum (CFRF) published a guide providing practical recommendations to firms of all sizes on the financial risks associated with climate change.

The CFRF is a forum established by the PRA and the FCA in March 2019 to consider and advise on the UK financial sector's response to climate change.  The members of the CFRF and its related working group include banks, insurers and asset managers. This guide, along with earlier statements from the PRA and FCA, stress the significant impact that UK regulators expect climate change to have on the financial services sector and consumer decision-making. The CFRF draws on the examples of climate risk on insurance (where failure to adequately plan for climate risks could increase the cost of insurance for some consumers and reduce the availability of insurance for others) and banking (where management of climate-related risks could affect a borrower or counterparty's credit rating).

The guide is the first of its kind published by the CFRF, and is being promoted as "written by industry for industry to help firms approach and address climate-related financial risks". The guide aims to help firms understand the risks that arise from climate change, and to provide support on how to integrate these risks into their decision-making processes. The key areas identified to help firms develop their own climate risk strategies are:

  1. Risk management - embedding climate-related financial risk into governance and risk management processes
  2. Scenario analysis – modelling and considering a range of possible scenarios to better understand and manage future risks, and transition to a net-zero carbon economy
  3. Disclosures – improving transparency by making effective climate-related financial disclosures
  4. Innovation – developing novel products, services, policies and approaches to adapt business to the potential impacts of climate change, benefit consumers and deliver the change required to meet climate goals

Each chapter within the guide provides practical tools, experience, knowledge and case studies from the authors. Throughout the guide, the CFRF urges firms to act now, to start considering their climate strategy, and to iterate their approach. The guide stresses that while the full impact of climate change may not be known for many years, the challenge firms will face becomes bigger with every year without meaningful action.

UK regulators are increasingly placing a greater focus on climate change, amid pressure from consumers to lead a green recovery from the economic impacts of COVID-19. The Bank of England in particular is looking to take a leading role in this area, and there is expected to be continued pressure on firms in all sectors to consider their sustainability strategy ahead of the rearranged COP26 UN Climate Change Conference, now due to take place in Glasgow in 2021.