UK regulator-chaired industry group issues guidance on managing climate-related financial risks

The group is developing a scenario analysis tool for SMEs expected in 2022

The UK’s Climate Financial Risk Forum (CFRF), which consists of senior financial sector representatives, has today published 10 guides setting out best practices to help banks, asset managers, insurers and other financial institutions address climate-related financial risks and opportunities.

The guides are themed around topics such as managing the legal risks which could arise from climate disclosures, climate scenario analysis, climate data and metrics, and risk management. They build on a first round of industry-produced guides published by the CFRF in 2020. 

The CFRF is convened and chaired by the UK’s Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – the Bank of England unit responsible for the prudential regulation and supervision of banks. 

However, the chairs said they did not “accept liability for the views expressed in the [latest] guides, which do not necessarily represent the view of the regulators and do not constitute regulatory guidance”. 

The use of scenario analysis to identify potential exposures to climate-related risks and assess portfolio alignment with the Paris Agreement is a particular focus of the group, with two guides published on implementing scenario analysis and a listing of available tools and providers. 

The CFRF Scenario Analysis Working Group, chaired by Aviva’s Interim Group CRO Guus Schoorlemmer, has also announced that it will launch an online climate scenario analysis tool for smaller firms in the first quarter of 2022. Users will only be required to input basic information regarding a user’s business activities, products, or risks. 

With regards to concerns over litigation risk as a result of “third-party information which may be directionally correct but inaccurate in detail”, the CFRF suggested that financial institutions include “clear disclosure as to this context, their own approach and methodology and how data is sourced”, and potential limitations of the data. 

The guides were produced by four CFRF working groups focused on disclosures, scenario analysis, risk management and innovation. 

The CFRF meets three times a year and reports to PRA CEO and BoE Deputy Governor Sam Woods and FCA CEO Nikhil Rathi. 

Separately, BoE’s Executive Director for Financial Stability, Strategy and Risk, Sarah Breeden, yesterday called on regulated financial institutions to further develop their capabilities around climate scenario analysis, describing it as being of “fundamental importance in managing the risks from climate change”. 

“As stewards of the financial system, scenario analysis must remain a core component of the central bank and supervisory toolkit. Indeed, our supervisory work has also indicated that scenario analysis is an area where our regulated firms need to do more,” she said. 

However, she acknowledged that carrying out the exercise is “fiendishly complicated”, in part due to the “incomplete and inadequate” data and methodologies which are needed to convert climate risks to macroeconomic and financial risks. 

Breeden made the comments during a speech on the ongoing work conducted by green central bank group the Network for Greening the Financial System (NGFS) to design climate scenarios for supervisory use. Earlier this week, the NGFS published a report surveying the climate scenario exercises of 30 of its members. 

Breeden chairs the NGFS workstream which is responsible for developing the climate scenarios.