A group of 21 institutional investors, including Sarasin & Partners, has written to the Bank of England’s Prudential Regulation Authority to seek its support in delivering improved climate risk disclosures at banks. We view climate risks as potentially material to banks’ long-term capital adequacy and to financial stability.
Climate change poses risks to financial stability
Climate change poses risks to financial stability. This has been repeatedly made clear by the Financial Stability Board and member central banks. Whether we are grappling with unprecedented droughts, flooding, freezing or heat waves, a warming planet means economic disruption. Efforts to decarbonise, while necessary to prevent the worst impacts from climate change, will themselves lead to dislocation in key sectors, just as they offer opportunities for growth in others.
Investors have a clear interest in promoting effective climate risk management in banks. This can help ensure that capital is protected in individual banks, while also promoting more enduring growth and thus better returns across the economic system.
Pillar 3 of the Basel Framework needs strengthening
Since 2015 the Bank of England and other like-minded central banks have been at the forefront of regulatory efforts to protect against threats posed by climate change and accelerating decarbonisation. However, while central bankers conduct increasingly detailed climate stress tests, bank-specific results are rarely shared.
This leaves shareholders and creditors in the dark on the potential climate risks embedded in bank balance sheets.
This dearth of disclosure doesn’t just raise risks for investors; it undermines a core element of the prudential architecture intended to support financial stability: market discipline – also known as Pillar 3 of the Basel Framework.
Against this backdrop, 21 institutional investors, including Sarasin & Partners, have written to the Prudential Regulation Authority to seek their support in delivering improved climate risk disclosures. We are asking for disclosures on how material climate risks have been factored into banks’ financial statements, auditor reports and capital adequacy reporting. Investors furthermore wish to ensure these disclosures cover severe but plausible climate scenarios that consider the latest science on tipping points and other non-linearities, something that has often been missing.
These requests are not just important to support financial stability, they are consistent with existing rules around capital adequacy and financial reporting in the UK and elsewhere. The investors have therefore copied their letter to the UK’s Financial Reporting Council, given its role in enforcing existing accounting and audit requirements, the Financial Stability Board and the Network of Central Banks for Greening the Financial System (NGFS).
Read the full letter here.
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