Financial Institution Climate Risk Statement
The Bank of England (BoE) issues a climate risk statement for financial institutions, aimed at providing guidance for their climate risk management.
In 2019, the Bank of England released its first climate related risk management document, requiring banks and insurance institutions to address financial risks arising from climate change. The statement released this time reflects the development of international standards and the market’s understanding of climate risks.
Related Post: Bank of England Releases Consultation Paper on Climate Risk Management in Financial Industry
Climate Risk on Financial Institutions
The impact of climate risk on financial institutions includes physical risk and transition risk. Physical risks are related to specific weather events and long-term climate change, while transition risks arise from climate change mitigation, including technological innovation, regulatory policies, and market changes. The characteristics of climate risk include:
- Systemic: Climate risks affect every market participant to varying degrees, and these impacts are correlated, nonlinear, and irreversible. Over time, climate risks may exceed market expectations.
- Uncertain: The scale and timing of climate risks are uncertain, and there are various combinations of physical and transition risks, but to some extent, they can be predicted by emission pathways.
- Relevant: The scale and frequency of future climate risks may be influenced by current climate actions.
Introduction to Financial Institution Climate Risk Statement
The Bank of England believes that financial institutions’ climate risk statements need to include the following parts:
- Governance: The board of directors and executives of financial institutions need to consider the impact of climate risks to ensure stable operations.
- Risk Management: Financial institutions need to establish a comprehensive risk management framework to effectively identify, measure, monitor, manage, and report risks.
- Climate Scenario Analysis: Financial institutions should use climate scenario analysis to identify, quantify, and manage climate risks.
- Data: Financial institutions should identify and evaluate data gaps, invest in data tools, frameworks, and capabilities.
- Disclosures: Financial institutions need to disclose climate risks and their uncertainties to enhance transparency in risk management.
- Specific Issues: Including bank specific issues and insurance specific issues. For example, internal capital adequacy ratio and internal liquidity adequacy ratio of banks.
The climate risk statement will take effect on December 3, 2025, and financial institutions will have six months to conduct internal reviews. Subsequent financial institutions need to regularly update their internal risk assessments and proposed climate actions.
Reference:
Enhancing Banks’ and Insurers’ Approaches to Managing Climate-related Risks
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