'Further progress needed by all firms' in embedding climate risk management, PRA warns

Written by Adam Cadle

21/10/2022

The Prudential Regulation Authority (PRA) has told insurers and banks “further progress is needed by all firms” in embedding climate risk management, and repeated its observation around the lack of robust data to support the process.

In a letter to banks and insurers, PRA CEO Sam Woods set out the regulator’s overall thinking on how firms performed against a climate risk stress test conducted earlier this year.
He praised the current progress in adopting climate risk management and governance, but also outlined the focus areas for improvement.

On scenario modelling, Woods added: “Firms should by now be able to satisfy supervisors that they have embedded scenario analysis into their risk management and business planning processes and are able to demonstrate how the results are being used in practice.”

“Firms should also be able to explain how the selected scenarios are relevant to their strategy and business and appropriately test their specific vulnerabilities – for example, the extent to which scenarios cover extreme and less frequent events,” he added.

In terms of use of data on climate risks, Woods said that, as expected, the PRA observed that, although data is being used effectively, all firms were in need of “more robust, standardised climate-related data of sufficient coverage”.

On governance, Woods said that, by now, executives should understand how their firm is integrating climate considerations into business strategies, planning and governance structures.

“They should be able to show that the approach across these areas is coherent and supported by available metrics and risk appetites that provide an effective measure of vulnerabilities to climate risk.”

Woods said many firms, which did not disclose material climate risks in some disclosures, provided “no information to indicate why the firm’s climate risks were considered to be immaterial”.

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