Bank is exploring whether to use capital add-ons or scalars to address weaknesses in climate risk management.
The Bank of England (BoE) has released a new report exploring the links between climate change and the regulatory capital framework, with the aim of accelerating research to inform its future approach.
The report says that as climate change becomes part of the core supervisory approach, firms should expect to demonstrate effective management of climate-related financial risks through regular supervisory engagements and reviews.
The BoE prudentially regulates and supervises financial services firms through the Prudential Regulation Authority (PRA).
The report says that firms making insufficient progress on the management of climate-related financial risks could be subject to measures under the PRA’s supervisory toolkit – including the use of “risk management and governance related capital scalars or capital add-ons”.
“We find that regulatory capital is not the right tool to address the causes of climate change (greenhouse gas emissions), but should have a role in dealing with its consequences (financial risks),” the report says.
The BoE says climate-related financial risks are partially captured by the existing regulatory capital framework, such as through reference to credit ratings and the accounting regime.
However, “this capture is imperfect” as there are gaps such as those related to the lack of relevant granular data and modelling techniques that can fully incorporate climate factors.
The report says further work is needed to identify whether changes in the design, use or calibration of the regulatory capital framework are needed to ensure resilience against the financial consequences from climate risk.
The BoE plans to provide more guidance on its approach by the end of 2022.
Separately, the Financial Conduct Authority (FCA) has released its own report saying it will scrutinise how well green products and services align with the claims firms make, to address the risk of greenwashing, which it calls a “material risk”.
“We expect all firms offering green products and services to ensure that their design and delivery match their marketing and reasonable expectation of consumers,” the report says.
In July, the FCA set out concerns about the quality of ESG fund applications in a letter to the chairs of authorised fund managers. The letter included guiding principles to help fund managers ensure their disclosures accurately reflect the nature of their responsible or sustainable investment strategy.