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Western EuropeJuly 17 2020

UK banks ordered to plan for climate change risks by 2021

Financial firms warned reporting climate-related information will soon become mandatory.
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UK banks ordered to plan for climate change risks by 2021

Banks and insurers have been ordered by the Bank of England to draw up plans by the end of 2021 detailing how they will cope with climate change risks. 

The move builds on advice to financial firms in October 2019 to plan around mitigating climate related risks and transition risks to a net zero carbon economy, but this time the central bank has added a deadline, which ramps up the pressure. 

In a letter to CEOs, deputy governor Sam Woods wrote that some areas of implementation face few barriers while there are challenges in others. Where those challenges exist, Mr Woods said the central bank will work closely with firms to tackle them. 

For instance, he acknowledged that data limitations may make it hard for firms to calculate the full impact of climate events on their capital by the end of 2021. Nonetheless, firms are still expected to explain the steps they are taking to manage these risks and that they have adequate levels of capital in place. 

The Bank of England also published guidance on climate risk issues for financial firms and promised that more would follow. 

Mandatory reporting 

At an online meeting, bankers were warned by the central bank’s executive sponsor for climate change, Sarah Breeden, that reporting climate-related information should soon become mandatory and that they should act now rather than waiting for it to become obligatory. 

"The regulator, like the FCA [Financial Conduct Authority] before it, has also made sure it is walking the walk as well as talking the talk after publishing its own TCFD [Task Force on Climate-Related Financial Disclosures] report. This allows it to understand the issues that regulated firms face in doing the same. And makes sure that firms have no excuse not to comply," said Lorraine Johnson, regulation counsel at law firm Ashurst. 

[There is] widespread frustration with banks, their commitment to fossil fuels and their failure to develop decarbonisation strategies.

Robin Penfold, financial services partner at law firm TLT, said there is growing consensus on the need for a green-led recovery and the publication of the Climate Financial Risk Forum Guide by the Bank of England provides a toolkit for firms to assess their exposure to climate-related financial risks and understand the opportunities that arise from green finance.

“This guide has the potential to spur the expansion of a vast new green market that would provide the foundations of a green economic recovery,” said Mr Penfold. 

Meanwhile, the Climate Safe Lending (CSL) Network, largely made up of banks, published a report calling for a new take on the term AAA, normally denoting credit quality, to describe banks that “anticipate risk”, “add value” and “act now” when it comes to dealing with the climate-related challenges. It said the report is a response to widespread frustration with banks, their commitment to fossil fuels and their failure to develop decarbonisation strategies.

This article first appeared in The Banker's sister publication Global Risk Regulator.

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