Bank of England – update on climate change and prudential thinking

On 13 March 2023, the Bank of England (the Bank) published its latest report on climate-related risks and the regulatory capital frameworks for banks and insurers. 

It is the first update on the policy position of the Bank in relation to climate-related risks since the October 2021 Climate Change Adaption Report and follows on from various reviews of these risks, including the climate and capital conference in October 2022, the PRA’s thematic review and results of the 2021 Climate Biennial Exploratory Scenario (CBES). 

The current position of the Bank as set out in the Report is that there will be no change to the existing policy, including:

• no change to time horizons;
• no requirement for firms to hold more capital against assets exposed to carbon-intensive energy sources; and 
• no introduction of macroprudential tools to address climate-related risks. 

However, the Report acknowledges that there are various uncertainties and concerns in relation to whether and how fully the current regulatory prudential framework captures climate-related risks, therefore substantial further research is required in a number of areas. 

In the interim, the short-term priority of the Bank is on ensuring firms improve their identification, measurement and management of risks. This includes robust and consistent financial/regulatory accounting, strategic actions to manage exposures and demonstrating in ICAAPs and ORSAs the analysis behind how the firm is comfortable that any material climate risks are appropriately capitalised.

Our detailed client note on the Report can be found here.