Shearman & Sterling LLP | Financial Regulatory Developments Focus | Prudential Regulator Reports on Climate-Related Financial Risks for the UK Banking Sector
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  • Prudential Regulator Reports on Climate-Related Financial Risks for the UK Banking Sector
    09/26/2018
    The U.K. Prudential Regulation Authority has published a report entitled "Transition in thinking: The impact of climate change on the U.K. banking sector".

    The purpose of the report is to: (i) examine the financial risks from climate change that impact PRA regulated banks, building societies and designated investment firms; (ii) assess how those entities are responding to and managing the financial risks from climate change; and (iii) assist those entities in understanding the PRA's supervisory approach to the financial risks from climate change. The report will also be used to inform the Bank of England's wider work to assess the system-wide financial risks from climate change.

    The report outlines the two key climate-related risk factors that give rise to financial risks for the banking sector. These are: (a) "physical risks" from climate and weather-related events, such as heatwaves, droughts, floods, storms and rises in sea level; and (b) "transition risks" arising from the process of adjustment towards a low-carbon economy. For the banking sector, climate-related risk factors manifest as increasing credit, market and operational risks. The report presents four case studies that demonstrate how the financial risks from climate change are already relevant to the banking sector.

    The report sets out the PRA's assessment of how firms in the sector have been enhancing their approach to climate-related risks. The PRA believes the issue needs board-level attention and it will shortly be launching a consultation on its supervisory expectations. It also plans to launch a climate financial risk forum with the Financial Conduct Authority, which will invite participation from the private sector, technical experts and other relevant stakeholders.

    View the report.

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