The Bank of England and UK financial regulators have published a guide to help the financial services sector analyse and disclose the risks and opportunities of climate change, which could encourage green finance and lay the foundations of a green economic recovery.
The Climate Financial Risk Forum, set up in March 2019 by the Prudential Regulation Authority and Financial Conduct Authority, has published a guide to help banks, insurers and asset managers understand the risks of climate change and add them to their strategy and decision-making processes.
The guide is not mandatory, but sets out the Bank of England’s expectations for firms that it regulates. It hopes to encourage innovation and the development of new green products that could help the UK to meet its 2050 goal of carbon neutrality.
Sarah Breeden, the PRA co-chair of the CFRF and executive sponsor for climate change, said the guide was “a significant step forward in building a UK financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy”.
The Bank of England is encouraging companies to push ahead with climate thinking despite delaying the launch of its own climate stress test until mid-2021 as the financial sector grapples with the coronavirus crisis.
The guide gives recommendations to firms on disclosing climate-related financial risks including risk management, scenario analysis, and innovation in consumer products, by sharing tools, experience, knowledge and case studies.
It focuses on risk management to inform business decisions and improve resilience, scenario analysis to understand future risks in the transition to a net-zero economy and also pushes for disclosure to improve transparency and innovation to create new products.
"Most regulations make requirements on reporting and disclosing, banks need to report and there are initiatives by central banks for stress testing," said Leonie Schreve, ING's global head of sustainable finance.
"It is important that what we see with regulatory developments that the approaches of stress testing and reporting are aligned, so there are not additional requests on top of regulation. Otherwise sustainability will be a burden and we want to make it easier and facilitate it," Schreve said.
The guide follows work by the PRA on banks and insurers’ management of the financial risks of climate change, and the FCA’s proposals to improve issuers’ climate risk disclosures by applying the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
"The financial services industry has a significant role to play if we are to meet the UK's target of net zero by 2050," said Sheldon Mills, the FCA co-chair of the CFRF and interim executive director of strategy and competition. "The CFRF is a positive example of collaboration between regulators and industry to find common ways to overcome barriers to meeting this challenge."