Consultation on draft Prudential Practice Guide on Climate Change Financial Risks infographic - accessible version
Objectives:
- Understand risks and opportunities that may arise from a changing climate
- Ensure investment, lending, and underwriting decisions are well-informed
- Implement proportionate governance, risk management, scenario analysis and disclosure practices
Physical risk:
- Changing climate conditions
- Extreme weather events
Physical risk includes direct damage to assets or property and may lead to:
- Lower asset values
- Defaults on loans
- Increased insurance claims
Transition risk:
- Policy changes
- Technological innovation
- Social adaptation
Transition risk includes disruption from adjustment to low-carbon economy and may lead to:
- Impacts on pricing and demand
- Stranded assets
- Supply chain disruption
Liability risk:
- Stakeholder litigation
- Regulatory enforcement
Litigation risk may arise through entities not considering or responding to the impacts of climate change and may include:
- Business disruption resulting from litigation
- Penalties resulting from litigation
Better practice in management of climate change financial risks:
- Identify and measure risks, including high exposure sectors, to understand potential impacts on business model
- Monitor risks through regularly updated metrics, both qualitative and quantitative
- Consider scenario analysis to inform understanding of long term risks and opportunities
- Evidence plans to manage risks through mitigation plans, including through engaging customers and counterparties
- Report relevant information to board and senior management, consider external market disclosures
Timeline:
April 2021 – Consultation commences
31 July 2021 – Consultation closes
Late 2021 – Consultation finalises guidance