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UK regulators climate change adaptation reports

Author: ICAEW Insights

Published: 09 Nov 2021

The UK regulators of financial services are focused on making sure that the risks from climate change and the opportunities from the transition to a net zero economy are being identified and proactively managed across the financial sector.

To assess progress to date they have published their Climate Change Adaptation Reports to review how climate change affects their respective responsibilities and what actions the financial sector is taking in response to it.

The FCA’s Climate Change Adaptation Report sets out the measures the industry has taken to mitigate the risks climate change presents and the areas, such as retail investments and mortgages, where more needs to be done. This comes within the context of the FCA’s developing a strategic approach to climate change issues which will see climate considerations embedded in everything the regulator does, including policy choices, supervision and enforcement against firms. Additionally, the report examines how the industry is making commitments to reach net zero. These commitments must be put into action, backed up by appropriate governance and transition plans that will turn pledges into reality.

The PRA’s Climate Change Adaptation Report assesses how climate-related financial risks affect the firms it regulates, its work to support and drive improvements in firms’ capabilities to manage these risks effectively, and the consideration of what further policy action may be necessary.

The PRA issued the world’s first supervisory expectations for the management of climate-related financial risks in April 2019, and in July 2020 it set a deadline for them to be embedded as far as possible by the end of 2021. The report concludes that firms have made tangible progress against these expectations. However, some firms are materially more advanced than others, and there is still much further to go. As we move into 2022, the PRA will actively supervise against these expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis. 

The report highlights that the full supervisory and regulatory toolkit will have to be considered to provide the necessary assurance or remediation where appropriate.

Capital is a key part of the supervisory and regulatory toolkit. Whilst the PRA is keen to observe that capital requirement is not the right tool to address the underlying causes of climate change (greenhouse gas emissions), it should help provide resilience against its consequences (financial risks). The PRA already expects firms to hold capital against material climate-related financial risks, but in light of the report’s findings, they will be undertaking further work. This work will help determine whether changes to the design, use or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks. There will be an update on the approach in 2022 following a call for further research and a conference on climate change and capital requirements.

The Pensions Regulator’s Climate Adaptation Report indicates that there will be guidance published clarifying what they will look for from schemes as they assess, manage and prepare to report on climate-related risk and opportunities. To support trustees in meeting their duties, the proposed new code of practice will include several climate change modules. The draft proposals include a requirement that they assess climate-related risks and opportunities as part of their system of internal controls. The TPR will work with the Department for Work and Pensions to share best practice in climate risk reporting.