Europe

BOE Sets Deadline for UK Firms to Embed Climate Risk

By end-2021, financial firms will have to be able to demonstrate that their approaches to managing climate-related financial risk have been implemented and embedded in their organisations.

The BOE (Bank of England) has issued a letter to financial firms setting an end-2021 deadline for them to have fully embedded their approaches to managing climate-related financial risks in their organisational structures.

The BOE had previously asked firms to have implementation plans in place for managing climate-related financial risks by October 2019, but it had not set out a date for full implementation.

“We are now clarifying our expectations on timing,” the letter said. “Firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021.”

As such, end-2021 is the target date by which financial firms have to be able to demonstrate that they fully meet the expectations set out in the April 2019 supervisory statement:

  • embed considerations of financial risks from climate change in governance arrangements
  • incorporate financial risks from climate change into existing financial risk management practice
  • use (long term) scenario analysis to inform strategy setting and risk assessment and identification
  • develop an approach to disclosure on the financial risks from climate change

The letter says the BOE will work with firms to address challenges where they exist, for example in relation to data limitations that may prevent firms from embedding an end-state analysis of climate-related financial risks within capital frameworks.

“However, you should be able to explain what steps your firm has taken to ensure that, where appropriate, capital levels adequately cover the risks to which your firm is, or might be, exposed,” the letter says.

The letter points to the recent guidance on approaches to climate disclosure, risk management, scenario analysis and innovation, published by the Climate Financial Risk Forum (CFRF), which is co-chaired by the BOE’s PRA (Prudential Regulation Authority) and FCA (Financial Conduct Authority).

The letter says the BOE will also be issuing additional guidance such as reference scenarios prior to the launch of a 2021 Biennial Exploratory Scenario (BES), which will be focused on assessing the resilience of current business models of the largest banks, insurers and the financial system to climate-related risks.

The letter, available here, also sets out good practice for managing climate-related financial risks.

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