New guidance to help regulated firms manage climate-related financial risk has been published by the Bank of England's Climate Financial Risk Forum (CFRF) in advance of next week's COP26 conference opening in Glasgow. This is aimed at all financial services firms, including insurers and asset managers.
The Bank says the new guidance is written "by industry, for industry" and builds on the previous guidance issued in June last year.
The guides focus on risk management, scenario analysis, disclosure, innovation and climate data and metrics and have been endorsed by the leaders of both UK financial regulators.
Sam Woods, CEO of the Prudential Regulation Authority commented: “The contribution provided by the forum is based on the development of best practice for industry, by industry. Building on the excellent foundation provided by the 2020 guide, the papers published today provide practical guidance on a multitude of issues to help firms manage the financial risks generated by climate change. These risks are unique and demand an ambitious and strategic response from firms, and the material published today should aid this effort.”
Nikhil Rathi, Chief Executive of the Financial Conduct Authority commented: “These guides will help firms overcome some of the difficulties they’ve faced. Importantly, they also focus on innovation, so financial firms can see the opportunities, as well as challenges, from more effective climate-related financial risk management.”
The new guidance has been drawn up to help firms overcome the significant challenges they have encountered with the risk appetite statements, online scenario analysis tool and the climate metrics dashboards.
There are five CFRF working groups and they have gathered this fresh advice into 10 separate guides:
- Risk Management. The outputs for the Risk Management Working Group (RMWG) are designed to help retail banks, corporate banks, insurers and asset managers produce and implement risk appetite statements that integrate climate-related financial risks. Additionally, the RMWG has produced a paper that summarises a firm’s training needs for climate risks and opportunities and how they could be delivered as a coherent syllabus.
- Scenario Analysis. The Scenario Analysis Working Group (SAWG) has produced practical examples on how firms can incorporate sector specific points when developing an effective approach to scenario analysis. The SAWG will publish a publicly available online scenario analysis tool in Q1 2022. The tool will be designed for use by smaller firms who may not have the experience or resources to attempt independently.
- Disclosure. The Disclosure Working Group (DWG) has collated a number of case studies on disclosure from a variety of organisations that will be of interest to firms as they develop their approach to climate-related disclosures. The DWG has also produced guidance highlighting the legal risks associated with publishing a climate-related disclosure and how these risks can be effectively managed.
- Innovation. The Innovation Working Group (IWG) has focused on identifying and sharing practical opportunities to mobilise financial capital and steward an economy-wide transition to meet climate targets and the resultant briefing paper highlights the key points. Additionally, the IWG have produced a set of 7 short films highlighting innovative approaches to mobilising finance in support of the transition to net-zero.
- Climate Data and Metrics. The report on climate data and metrics recommends five areas where climate-related metrics could be employed: Transition Risks; Physical Risks; Portfolio decarbonisation; Mobilising transition finance and Engagement. The first part of the report provides detail on each of these areas. The second part focusses on implementation and provides practical guidance and support on convergence towards a set of common and consistent climate metrics.
The CFRF has been running since March 2019 and is chaired jointly by the PRA and the FCA, "reflecting the importance of climate change to their respective strategic objectives", says the Bank.