On 21 October 2022, the PRA published a letter it had sent to CEOs of PRA-regulated firms, which provides a summary of capabilities, to which PRA-regulated firms are expected to be able to demonstrate now, on approaches to managing climate risks.

The letter sets forth that every firm in scope of Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (SS3/19) should by now be able to: demonstrate how it is responding to the PRA’s expectations and set out the steps being taken to address barriers to progress and have measures in place that allow it to enhance approaches as industry practice develops and new data and tools become available. Where a firm has not taken action to embed any element of the PRA’s expectations, it should be able to articulate why this is the case and the steps it plans to take to address any constraints.

The letter addresses the PRA’s expectation for the following areas:

• Governance: Boards and executives should by now be able to demonstrate that they understand how their firm is integrating climate considerations into their business strategies, planning, governance structure, and risk management processes.
• Risk management: By now, firms should have embedded an appropriate understanding of climate risk within their Risk Management Framework (RMF). Risk Appetite Statement (RAS), committee structures, and three lines of defence, using both qualitative and quantitative measures.
• As part of their RMF work, firms should be able to demonstrate that climate risks have been appropriately factored into their quantitative analysis – for example through properly developed quantitative climate risk modelling capabilities, appropriate metrics and the use of prudent assumptions and proxies where data gaps exist.
• To aid the consideration of climate risks within their business strategy and risk appetite, firms should have a counterparty engagement strategy. Furthermore, firms’ Own Risk and Solvency Assessments (ORSAs) or internal Capital Adequacy Assessment Processes (ICAAPs) should by now, provide sufficient contextual information to allow a reader to understand analysis of climate risks and capital.
• Scenario testing: Firms should now be able to satisfy supervisors that they have embedded scenario analysis into their risk management and business planning processes and are able to demonstrate how the results are being used in practice, including their impact on strategic and business decision-making.
• Data: Firms should now be able to explain how they identify their significant data gaps, what plans they have to close those gaps, and what processes they have in place to ensure that developments in data and tools will be identified and incorporated into their approach.

Next steps

Compliance with the expectations in SS3/19 will be assessed by the PRA on an ongoing basis and firms should continue to demonstrate effective management of climate risks through regular supervisory engagement and reviews.

Firms judged not to have made sufficient progress in embedding the PRA’s expectations should expect to be asked to provide a roadmap explaining how they intend to overcome the gaps.