There have been a number of publications regarding climate change recently. We consider the key publication to be the letter on 1 July 2020 from Sam Woods "Managing climate-related financial risk – thematic feedback from the PRA’s review of firms’ SS3/19 plans and clarifications of expectations". Annex 1 of the letter contains the thematic findings of the review of firms’ plans to address SS3/19. It states that "Firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021." Regulators are looking at mandating climate-related financial disclosures. Of particular relevance to OAC’s clients, the PRA expects to see appropriate climate-related discussion of results in ORSAs.
When considering appropriate scenarios, we should be aware that, on 29 June 2020, the Climate Financial Risk Forum (CFRF) published a guide written by industry for industry providing practical recommendations to firms of all sizes on disclosure of climate-related financial risks; effective risk management; scenario analysis, and opportunities for innovation in the interest of consumers. The scenario analysis chapter cites scenarios published by the Network for Greening the Financial System (NGFS) (a network established by central banks and supervisors including the BoE) as a useful reference.
Sarah Breedon's speech on 1 July 2020 puts it simply "[financial firms] need to make financial decisions that take the risks and opportunities from climate change into account." The BoE Executive Director, with oversight of the enhancing resilience to climate change, sees scenario analysis at the heart of firms' approaches. She recognises that "most firms have significant gaps in their climate scenario analysis capabilities" but firms need to act and adds that "firms can and should explore the use of reasonable proxies and assumptions to work around these issues [around science, data or tools], rather than leaving risks unrecognised”. Unsurprisingly, this is a very readable speech, which we recommend, as it covers a good range of issues including transition and physical risks which we expect to hear mentioned more and more.
David Gray, Actuarial Consultant at OAC, comments: “I am in no doubt that this will be a key regulatory focus which needs to be acted upon by insurance firms (let alone have wider implications for us all). OAC recommends that clients incorporate climate risk within their ORSAs where not already doing so.”
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