Rising to the challenge: climate risk in the UK banking sector

Few banks or building societies would dispute the fact that climate change has steadily crept up the risk register in recent years.

Despite the COVID-19 pandemic, firms and regulators are keen that the climate risk agenda continues to progress. The Bank of England has continued to emphasise that climate risk is a strategic priority and the Prudential Regulation Authority (PRA)’s 2020-21 Business Plan clearly sets out that climate change brings financial risks that need to be managed now. There is therefore a clear regulatory expectation that firms should continue to make progress executing the plans they submitted in response to the PRA's Supervisory Statement on managing climate risk (SS3/19). The PRA’s Dear CEO letter in July 2020 has also now confirmed a deadline of the end of 2021 for fully embedding the regulator’s expectations on climate risk.

We surveyed PRA-regulated banks and building societies to understand the state of play across the sector with regards to implementing the PRA’s expectations in relation to SS3/19. Our report sets out the results of this exercise and our observations on common challenges and potential ways forward, as well as providing insights across the industry about the implementation of the climate risk plans and banks' wider strategic efforts to embed climate risk management.

Key findings

71% of respondents state that climate risk is embedded in the firm’s long-term corporate strategy...but only 29% have set a science-based target or Net Zero strategy
70% of respondents are in the process of defining metrics to quantify their exposure to climate risk with a wide range of metrics under consideration and little consistency between firms
94% of respondents have used initial climate change analysis to explore new business opportunities...but only 53% have incorporated this analysis into risk assessments

65% of respondents have not explicitly defined climate risk within their Group Risk Appetite Statement
53% of respondents have conducted scenario analysis...but 100% of respondents cite lack of data as a key challenge to conducting the exercise
94% of respondents agreed that TCFD-aligned disclosures should become mandatory

Looking ahead - what are the key questions banks need to ask themselves?

How do you intend to integrate climate risk more explicitly into your risk management frameworks? Has it been defined against your risk appetite, and allocated a specific risk type?

In order to evidence a strategic approach to climate risk management, will you set a science-based target or Net Zero strategy for your firm?

How will you evidence progress in enhancing your scenario analysis capabilities, including the establishment of appropriate processes for gathering data and complementing qualitative analysis with quantitative analysis?

How will you ensure your risk metrics are informed by reliable data and accurately reflect your exposures to climate risk, in order to facilitate robust risk monitoring and risk management?