Climate Risk – PRA Guidelines Coming Into Force

The new requirements set out by the PRA have forced financial organisations to assess the financial risk of climate change stressing the sector must raise the bar on climate risk evaluation.  

Businesses must address their exposure and how to protect their asset portfolios. Last month Sam Woods Deputy Governor for Prudential Regulation and CEO of the PRA sent a letter to all PRA-regulated firms confirming that;

by the end of 2021, your firm should be able to demonstrate that the expectations set out in SS3/19 have been implemented and embedded throughout your organisation as fully as possible. In doing this, you should continue to take a proportionate approach that reflects your institution’s exposure to climate-related financial risk and the complexity of its operations.

Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA

This applies to all firms and larger firms undertaking the annual cyclical stress test also need to undertake the 2021 BES on climate-related financial risks. Others are still required to undertake scenario analysis as part of their Internal Capital Adequacy Assessment Process (ICAAP) and in doing so are now expected, as a minimum, to identify all material exposures relating to financial risks from climate change and assess how they have determined the materiality.

These deadlines come two and a half years since the publication of SS3/19 and place further pressures on financial organisations that are in the height of the COVID-19 pandemic.

So how much progress is being made and what help is available?

As lenders come under increasing pressures, they must review their risk management systems. This includes ensuring they have mature systems and become more sophisticated in their risk management approaches, perhaps increasing data granularity, adoption of new metrics and integration of origination and valuation systems which help them to monitor risk.

Physical risks are on the increase as the changing weather impacts on businesses as seen with the damage from storms and flooding here in the UK. If organisations fail to implement risk assessment strategies this can lead to financial losses and sudden adjustments in asset values. COVID-19 has demonstrated more than ever the need for firms to forward plan and be risk aware. At D-Risk we combine our expertise and understanding with the latest data intelligence to help lenders meet the PRA regulations. We can help you to outline and implement the correct steps to help you on your climate journey.

We understand that risk needs to be addressed at an early stage of the lending process and sound underwriting at loan origination is an important part of the solution. There is a gap in how and when lenders collect data regarding the mortgage security of a property. This often means that consideration of environmental risks on the property is limited and only takes place after the mortgage offer has been issued, through the conveyancing process. It is now recognised that this needs to change, to build a platform to collect data, for future decisioning and the ability to manage climate risk.

Talk to us at D-Risk about how we can work together to achieve a proportionate and integrated approach to your scenario analysis.