New guides published to help FIs manage climate-related risks

A second round of guides to help financial institutions manage climate-related risks have been published by the Climate Financial Risk Forum (CFRF.)

The guides, which build on those published in June last year, focus on risk management, scenario analysis, disclosure, innovation, and climate data and metrics.

The CFRF has been running since March 2019 and is chaired jointly by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA.)

“The contribution provided by the forum is based on the development of best practice for industry, by industry,” said Sam Woods, chief executive, PRA. “Building on the excellent foundation provided by the 2020 guide, the papers published today provide practical guidance on a multitude of issues to help firms manage the financial risks generated by climate change.”
Woods added: “These risks are unique and demand an ambitious and strategic response from firms, and the material published today should aid this effort.”

Five CFRF working groups are collectively publishing a total of 10 guides today, summarised in a Bank of England statement:

Risk Management. The outputs for the Risk Management Working Group (RMWG) are designed to help retail banks, corporate banks, insurers and asset managers produce and implement risk appetite statements that integrate climate-related financial risks. Additionally, the RMWG has produced a paper that summarises a firm’s training needs for climate risks and opportunities and how they could be delivered as a coherent syllabus.
Scenario Analysis. The Scenario Analysis Working Group (SAWG) has produced practical examples on how firms can incorporate sector specific points when developing an effective approach to scenario analysis. The SAWG will publish a publicly available online scenario analysis tool in Q1 2022. The tool will be designed for use by smaller firms who may not have the experience or resources to attempt independently.
Disclosure. The Disclosure Working Group (DWG) has collated a number of case studies on disclosure from a variety of organisations that will be of interest to firms as they develop their approach to climate-related disclosures. The DWG has also produced guidance highlighting the legal risks associated with publishing a climate-related disclosure and how these risks can be effectively managed.
Innovation. The Innovation Working Group (IWG) has focused on identifying and sharing practical opportunities to mobilise financial capital and steward an economy-wide transition to meet climate targets and the resultant briefing paper highlights the key points. Additionally, the IWG have produced a set of 7 short films highlighting innovative approaches to mobilising finance in support of the transition to net-zero.
Climate Data and Metrics. The report on climate data and metrics recommends five areas where climate-related metrics could be employed: Transition Risks; Physical Risks; Portfolio decarbonisation; Mobilising transition finance and Engagement. The first part of the report provides detail on each of these areas. The second part focusses on implementation and provides practical guidance and support on convergence towards a set of common and consistent climate metrics.

“These guides will help firms overcome some of the difficulties they’ve faced,” said Nikhil Rathi, chief executive of the FCA. “Importantly, they also focus on innovation, so financial firms can see the opportunities, as well as challenges, from more effective climate-related financial risk management.”

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