October 2019
The climate change gamechanger
Insurance companies and banks have until 15th October to inform regulators which senior figure(s) in the business will now be responsible for identifying and managing climate change risks.
This bold step by the Prudential Regulation Authority (PRA) centres upon individual accountability under the Senior Managers and Certification Regime (SMCR), which the government and the Bank of England set up to address concerns that, following the last financial crisis, it was all too easy for individuals to hide behind the corporate veil.
For the first time, senior managers will be held personally accountable for governance failures relating to the financial consequences of climate change. This will not mean that the directors will escape responsibility. Ultimately the board remains responsible for the company’s assessment, mitigation, adaptation and disclosure of financial risks resulting from climate change. Accordingly, those at the highest level of the company will be vulnerable if the company is found not to have taken appropriate steps.
What the PRA expects from banks and insurers
The board needs to understand and assess the financial risks from climate change and oversee these risks as part of the firm’s long-term strategy. This means there needs to be:
- clear roles and allocation of responsibilities;
- evidence the board exercises effective oversight of risk management and controls, deploying appropriate resources and skills/expertise to managing these financial risks;
- establishment of risk management frameworks to: identify, measure, monitor, manage and report on exposure to these risks.
How will senior executives be exposed?
“The board at the highest level of executive management should identify and allocate responsibility for identifying and managing financial risks from climate change to the relevant existing Senior Management Function(s) (SMF(s)) most appropriate within the firm’s organisational structure and risk profile, and ensure that these responsibilities are included in the SMF(s)’ Statement of Responsibilities” PRA SS 3/19
It’s clear that a failure to follow the PRA’s approach will have regulatory consequences for individuals, boards and companies. However, it doesn’t end there. The regulators’ stated expectations will be relied upon by courts when assessing the liability of company executives in civil litigation.
To learn about the financial risks posed by climate change, download the full report below
Greg Lowe
Global Head of Resilience and Sustainability
[email protected]
-t: +44 (0)207 086 6239
Ed Smerdon
Head of Coverage Team, Financial and Professional Services, Global Broking Centre
[email protected]
-t: +44 (0)207 086 0799
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