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In recent years, the effects of climate change have become more apparent, attracting attention from financial regulators globally. In a recent speech Sabine Lautenschläger, Member of the Executive Board of the ECB,  stated “climate change is not an issue for next century. It’s an issue for now, and it’s a topic not only for other sectors but also for the financial sector and for central bankers and supervisors”.1

The regulatory response to a transition to a greener economy is currently accelerating rapidly. A number of EU initiatives put climate change at the forefont of the financial regulatory agenda, and it is clear that the UK regulators will take an active lead.

Against a backdrop of institutional investor pressure and industry actions, central banks and regulators are placing a greater focus on the financial risks that arise from climate change. Banks and insurers incresingly need to think about how to adapt their business models and how the transition to a low-carbon economy may affect the business models and creditworthiness of the companies to which they are exposed.

The timeline below shows this regulatory response and the expected developments. We foresee regulators will continue to clarify their approach over the course of 2019.

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In responding to the financial risks from climate change, banks and insurers should be aware of the key regulatory proposals and expectations. To date, the NGFS (Network for Greening the Financial System), PRA (Prudential Regulation Authority), FCA (Financial Conduct Authority) and TCFD (Task Force on Climate Related Financial Disclosures) have published reports on how firms are responding to climate change and guidelines on actions that firms should take.

On 15 April 2019, the PRA published Policy Statement 11/19 (PS11/19)2 and with the publication of this PS the clock began to tick for UK deposit-takers, insurers and designated investment firms (collectively “firms”). By 15 October 2019 firms are expected to have put an initial plan in place to address the expectations set out in Supervisory Statement 3/19 (SS3/19)3. The key themes firms should be considering are:

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On 17 April 2019, the NGFS published its first comprehensive report on climate change as a source of financial risk.4 This report is a call to central banks and supervisors, to ensure that the management of climate related financial risk is at the forefront of their regulatory and supervisory agendas, and that the financial system is resilient to these risks.

The report makes six recommendations, aimed at central banks, supervisors, policymakers and financial institutions. They are not binding, but reflect “best practice”, as identified by the members of the NGFS. Despite their non-binding nature, we can expect they will be adopted by regulators in some shape or form, it is therefore imperative that firms engage with them to understand their potential impact.

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1

Banks and supervisors need to assess both qualitatively and quantitatively the impacts of physical and transition risks, and develop key metrics to monitor these risks. Climate‑related risk analysis should be undertaken to quantify the risk exposure across the financial system, using a consistent and comparable set of data‑driven scenarios, which considers multiple future states. The NGFS outlines the importance of regulators including climate‑related risks on their supervisory agenda, to ensure they receive the attention they require at the highest level within firms.

2

Central banks are encouraged to embrace the impact of climate change on their own operations, including publicly disclosing their approach to managing these risks. Consideration should be given to how central banks will adapt their investment strategies to include environmental, social and governance (ESG) aspects into their portfolios. One of the next steps the NGFS will take is to study the interaction between climate change and central banks’ mandates to promote green finance via monetary policy.

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One of the biggest challenges firms face is the availability of data. The NGFS is encouraging authorities to share data on climate risk assessments, publicly where possible, in an attempt to bridge data gaps. The NGFS has identified definite benefits to setting up a joint working group with interested parties as another avenue to bridging existing data gaps.

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work collaboratively across their institutions, with peers and wider stakeholders to understand the risks and opportunities posed by climate‑related financial risk, thereby identifying the impact on their future business models.

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The NGFS voices its support the recommendations made by the TCFD and highlights the importance of developing and implementing a robust and internationally consistent disclosure framework. All companies issuing public debt or equity as well as financial sector institutions are encouraged to disclose in line with the TCFD recommendations. This will ensure comparability across firms, which will be invaluable to regulators and investors. In addition, policymakers and supervisors are exhorted to consider the actions they can take to encourage wider adoption of the TCFD recommendations and the development of an internationally consistent environmental disclosure framework.

6

Policymakers are encouraged to collaborate with a cross-section of stakeholders both domestically and internationally with a view to developing a common taxonomy; this will enhance transparency and comparability across the industry and foster the transition to a low-carbon economy. A common taxonomy should be forward‑looking and take into account the changing technological and economic landscape, as well as international developments. It should be made publicly available and firms should be encourage to use it in their management of climate‑related risk

Next steps for firms – Deloitte’s perspective

Historically, most large firms have already developed an ESG approach and built up their teams in the areas of Investor communication, procurement and distribution of financial products, e.g.  “sustainable funds” etc. However, the forthcoming changes are more far-reaching, and are intended to standardise practices across the industry. They will require firms to adopt a full end-to-end approach, with the knock-on impact felt across every aspect of their business.

In the words of Mark Carney “the task is large, the window of opportunity is short, and the stakes are existential”5. Firms must act now to ensure their business models are resilient to the risks posed by climate change.

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1 Panel remarks by Sabine Lautenschläger, Member of the Executive Board of the ECB, at the Network for Greening the Financial System Conference, in Paris, France, 17 April 2019

2 PS Link: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policy-statement/2019/ps1119.pdf?la=en&hash=CD95D958ECD437140A4C7CF94337DAFD8AD962DE

3 SS Link: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/ss319.pdf?la=en&hash=7BA9824BAC5FB313F42C00889D4E3A6104881C44

4 NGFS Report Link: https://www.banque-france.fr/sites/default/files/media/2019/04/17/ngfs_first_comprehensive_report_-_17042019_0.pdf

5 Speech by Mark Carney at the European Commission Conference: A global approach to sustainable finance on the 21st March 2019.

David

David Strachan – Partner, Head of EMEA Centre for Regulatory Strategy

David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/ operating models of financial services firms. David joined Deloitte after 12 years at the FSA, where in his last role, Director of Financial Stability, he worked on the division of the FSA into the PRA and the FCA.

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Hubert Justal

Hubert Justal – Director, Audit and Risk Advisory

Hubert has over 16 years’ experience as a Finance and Risk executive specialising in Retail Banking and Capital Markets at Deloitte and Peat Marwick in London and Paris. He has worked with major domestic and international financial organisations to help grow and future proof their businesses, and has significant expertise in leading and delivering large change projects, operational management and growth strategy. He is well placed to understand and navigate the issues and challenges which face the financial sector as they adapt their business models and transition to a low-carbon economy.

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Esther Rawling

Esther Rawling – Associate Director, Audit and Risk Advisory

Esther is an Associate Director within Deloitte’s Risk Advisor team. She has extensive experience working with a number of firms across the financial services industry, on topics related to liquidity, capital, risk management and regulatory reporting and advising on how changes to regulations impact their business model.

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