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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