Bank of England set to implement new climate risk standards

The Bank of England has announced plans for a new set of rules on how it wants banks, insurers and investment companies to manage the financial risks of climate change. Speaking at a conference on sustainable finance hosted by the European Commission in Brussels, Governor Mark Carney said that companies will be “expected to embed fully the consideration of climate risks into governance frameworks, including at board level”.

The new rules, due to be published by the Prudential Regulation Authority (PRA), will address many of these issues in a more formalised way. They will also promote further climate considerations in risk management practices, the regular use of scenario analysis to test resilience, and minimum standards for the disclosure of climate risks.

Carney added: “The PRA has found that despite the sophistication of insurers in modelling climate risks, there are still gaps in their own risk management. The PRA is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side.”

While ultimate responsibility for establishing environmental rules rests with governments, financial regulators are increasingly seen as important in facilitating investment in green technologies and long-term sustainable planning.

Carney said that the Bank of England’s regulatory arm would recommend that banks, insurers and asset managers regularly test their strategic resilience against climate change risks, with financial firms would be expected to name a senior official personally responsible for managing these environmental risks, similar to the Bank’s existing requirements for the management of financial market and staff misconduct risks.

“Financial policymakers will not drive the transition to a low-carbon economy. Governments will establish the climate policy frameworks, and the private sector will make the necessary investments,” said Carney. “Nonetheless, financial policymakers do have a clear interest in ensuring the financial system is resilient to any transition hastened by those decisions. Our role is to develop the frameworks for markets to adjust efficiently.”

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