The UK's financial industry regulators have announced they are setting up a group to address financial risks arising from climate change and have issued two discussion papers exploring how financial institutions should react and prepare.

The announcement follows the landmark Intergovernmental Panel on Climate Change (IPCC) report, Global Warming of 1.5C, last week, which urged governments, organisations and individuals to take rapid action, in the form of “far-reaching and unprecedented changes in all aspects of society” to limit climate change to an increase of just 1.5 degrees Celsius.

Climate Financial Risk Forum announced

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) announced they are setting up a Climate Financial Risk Forum, the aim of which is to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in green finance. The forum will involve representatives from industry as well as technical experts and other stakeholders. Membership will be finalised by the end of November, with the first meeting scheduled for early 2019.

PRA: “risks becoming apparent now”

Meanwhile the PRA, which is the Bank of England's arm for effecting prudential regulation, published a consultation paper (Consultation Paper 23/18: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change) on expectations for the management of financial risks caused by climate change. It looks at how managing the far-reaching and foreseeable risks from climate change requires a strategic approach – including how actions today affect future financial risks. The paper relates to UK insurers, banks, building societies and PRA-designated investment firms.

In its statement the PRA said that climate change presents financial risks that will challenge the security and stability in the financial services industry. “While 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.”

Some of the expectations set out in the discussion paper include:

• Governance: There should be clear board-level engagement and responsibility for managing the financial risks from climate change. This includes identifying the relevant senior management function (SMF) holder(s);
• Risk management: Risks should be addressed through firms’ existing risk management frameworks, in line with their board-approved risk appetite, while recognising that the nature of financial risks from climate change requires a strategic approach;
• Scenario analysis: This should be conducted (where proportionate) to inform a firm’s strategic planning and determine the impact of the financial risks from climate change on its overall business strategy;
• Disclosure: Firms should consider the relevance of disclosing information on how financial risks from climate change are integrated into governance and risk management processes. This includes firms engaging with the wider initiatives on climate related financial disclosures, such as the Task Force on Climate-related Financial Disclosures (TFCD).

Responses to the PRA paper should be submitted by Tuesday 15 January 2019.

FCA: “disruptive and irreversible threat”

The FCA also published a discussion paper, DP18/8: Climate change and green finance, setting out its approach to climate change and green finance, specifically: the effects of climate change and how the transition to a low carbon economy may have a major impact on financial markets and on products that serve those markets. The paper looks at how climate change may affect the FCA’s statutory objectives of protecting consumers, protecting market integrity and promoting competition. And it focuses on four areas where it says greater regulatory focus is needed:

• climate change and pensions – ensuring that those making investment decisions take account of risks including climate change;
• enabling competition and market growth for green finance;
• ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change;
• the scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.

The FCA's chief executive, Andrew Bailey, said: “Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.”

Feedback on the questions set out in the FCA paper from all those interested in financial services will be accepted until 31 January 2019.