Banks and insurers must plan for climate change risks, says Bank of England

UK regulators said they want companies to come up with 'credible' plans to protect themselves from financial risks associated with climate change

Banks and insurance companies will be required to appoint a senior manager to take responsibility for protection from climate change risks under Bank of England plans announced today.

The central bank’s prudential regulation authority (PRA) has laid out guidelines to ensure firms have a “credible plan or policies in place for managing exposures” to climate change.

The PRA said board-level engagement was important and “scenario analysis” should be part of firms’ strategy planning to determine financial risks.

In a statement, it said: “Climate change and society’s response to it presents financial risks that are relevant to the PRA’s objectives of safety and soundness.

“Whilst 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.”

The PRA has teamed up with the Financial Conduct Authority to set up a Climate Financial Risk Forum to help the financial sector manage the risks.

Andrew Bailey, chief executive of the FCA, 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.

“The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way which meets users’ needs.”

Amrita Ahluwalia, a lawyer at Linklaters, said regulators were ramping up expectations for company policies on climate change.

“The message is loud and clear: the regulators want to know what the market is doing to proactively manage climate risks,” she said.

“We are seeing increasing interest from issuers and investors in the green and sustainable finance space and as a result, greater transparency on sustainable capital flows, but today's publication shows that the regulators want to see much more.”