Extreme weather events in recent years have highlighted how financial risks associated with climate change can affect businesses, driving EU regulators to focus on the financial impact of environmental risks in 2019, according to a Deloitte report.

The company's Financial Markets Regulatory Outlook 2019 suggests that UK, EU and other EMEA regulators in the financial services industry will shift their attention away from the slew of new laws that have been introduced to improve the financial services industry since the 2008 credit crunch, and instead focus on the practical implementation of these reforms.

Weather events bring climate risks to the fore

Deloitte's David Strachan believes that the first-time appearance of climate change in the outlook is a reflection of the “heightened importance that environmental issues are having on the financial services industry”. He said: “The exposure of firms to risk from climate change is now squarely on firms’ and regulators’ radars, with the prospect of regulators stepping in where voluntary actions by institutions aren’t deemed to be sufficient.”

Strachan adds: “A multitude of weather-related events (heatwaves, storms and wildfires) has brought climate change to the fore and made it evident that “physical risks” from severe catastrophes are on the rise, and that financial services firms can be directly and indirectly vulnerable to them. Regulators’ focus is moving beyond insurance firms to encompass banks and investment managers as well.”

More sustainability disclosure ahead

The report touches on some of the regulatory legislation that will turn the spotlight on climate risk. It notes that, when the EU Action Plan on Sustainable Finance is legislated in around 30 months, it's likely that corporates will be required to make substantial changes to their reporting, with more disclosures on sustainability risk. It also notes that the Prudential Regulation Authority (PRA) will finalise its Supervisory Statement on firms’ management of financial risks of climate change in early 2019, with other members of the ‘Network for Greening the Financial System’, such as the European Central Bank, German regulator BaFin and the Bank of Finland, likely to follow.

The report also reflects on some of the ‘profound changes’ that have been seen over the last decade in the structure of the economy, employment, and society, including:

• Brexit;
• IBOR transition;
• whether firms offer their customers value for money;
• the operational resilience of financial services firms;
• adapting to new technologies and;
• addressing cyber and financial crime.

The full report can be found at Deloitte.co.uk/RegOutlook