Engagement on climate risk

Regulatory requirements and expectations for banks and insurers set out by the Bank of England’s Prudential Regulatory Authority include those outlined in their Supervisory Statement SS3/19, which covers topics on:

  • The PRA’s position that climate change presents financial risks that could materially impact the financial stability of the UK economy
  • The factors and challenges through which climate change impacts on financial risks
  • Their expectation that banks need to take a strategic approach to consider, embed and incorporate the financial risks from climate change into their financial risk management practices

Section 3 of SS3/19 sets out the PRA’s expectations of how banks should embed climate considerations into their risk processes and frameworks. A number of these indirectly require banks to have enhanced management information and understanding of potential climate impacts on customers, but we also recognise several direct requirements to seek to understand potential current and future impacts of climate risk factors on clients and counterparties, and an expectation on firms to engage with them to gather necessary information.

Additionally, the UK financial regulators have identified that climate change poses long-term systemic risk to the financial stability of the UK economy, and over the future creditworthiness of individual businesses.

Requirements and implementation

UK banks were required to comply with SS3/19’s expectations by the end of 2021, and during 2022 the PRA began actively supervising firms’ compliance with SS3/19.

In October 2022, the Prudential Regulation Authority (PRA) published a “Dear CEO” letter outlining the capabilities they would expect banks to be able to demonstrate by now in light of SS3/19.

Observations included views that to aid the consideration of climate risks within their business strategy and risk appetite, firms should have a counterparty engagement strategy, which should inform firms about how their counterparties will look to manage climate exposures. Furthermore, banks demonstrating effective practice had developed their counterparty engagement processes to collect data on counterparties’ transition plans and evolving exposures to climate risks and had incorporated these into their risk management processes.

Our engagement on climate

OakNorth regularly considers the implications of climate risk throughout our business and our lending activity, and recognises its responsibilities towards identifying, managing, and responding to the risks posed by climate change.

Our data and analytics capabilities enable us to regularly stress test the impact of climate change on our loans, but we strive to better understand the challenges, implications and direct perspectives of our customers on addressing the threat of climate change.

Consequently, we regularly engage with customers on their latest position, understanding and approaches in response to climate change, and on ways in which we may be able to support them with the transition to a low carbon economy.

This may include data collection on customers’ measurement or reporting of greenhouse gas emissions, governance and review of climate-related matters, identification and responses to any climate-related risks or events, along with implementation of any standards, features or approaches to projects financed that support decarbonization or energy efficiency.

For more information contact [email protected]

See also: Climate change | Bank of England