International banks in the UK subject to same PRA requirements in relation to climate-related risks

The Prudential Regulation Authority (PRA) has confirmed that international banks and UK branches of international banks operating in the UK should consider climate change risk as a priority in 2021 and that they must have a framework that is fully operational by the end of the year. This removes any uncertainty. The surprise was that the expectations go beyond UK subsidiaries and also cover UK branches so that all banks in the UK will be subject to the same requirements and expected to play their part.

What has happened?

Since 2019, the Government’s Green Finance Strategy has been to use the UK’s status as a global financial centre to drive the greening of the international financial system, and set an expectation that all UK banks, insurers and wealth managers have to be making disclosures in accordance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations by 2022.

Whilst it was clear that these requirements covered UK banks, international banks have been debating the extent to which the PRA’s set expectations apply to them. With the publication of the Dear CEO Letter on 15 December 2020 by the International Bank Supervision Directorate (IBD) this debate was ended as it was ratified that international banks operating in the UK must meet the same prudential standards as domestically headquartered banks. An important element of this is that they need to be capable of effective supervision by the PRA.

This announcement elaborates on the PRA expectations for climate-related risk management set out in the PRA’s Supervisory Statement (the SS) 3/19 “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”.

What is the PRA basis and rationale?

The requirement to manage climate-related financial risk applies to all UK-incorporated PRA regulated firms. In the case of subsidiaries of international banks, the PRA has in general the same legal powers and follows broadly the same supervisory framework as for any UK-headquartered firm. This is to guarantee financial stability, that the context in which the firm operates does not affect its viability and that there is sound governance and risk management.

However, the PRA clearly indicated that branches also need to focus on climate change, as it is a vital element of sound risk management. While the PRA is not responsible for the prudential supervision of branches - this being a responsibility of the Home Country or in the case of the European Economic Area (EEA) of the Home State Supervisor - the PRA has indicated that they will be increasing collaboration with Home Country/State Supervisors on climate-related financial risk over the coming years in order to drive this forward

The challenges

Whilst there is plenty of guidance by the Climate Financial Risk Forum (CFRF), in our experience, one of the biggest challenges for international banks is to implement a framework that meets the regulatory requirements of the PRA and, is aligned with the framework set out by their head offices abroad and with the legal requirements of the jurisdictions in which they operate. Some countries have not yet implemented climate change laws.

Management in the UK need to be prepared to convey the appropriate message to their headquarters to ensure they understand that climate change risk is a priority in the UK and that measures need to be implemented as a matter of urgency.

Another challenge is how to integrate the climate change framework into the bank’s wider ESG strategy in the UK, as well as into the Head Office’s ESG strategy abroad. Overcoming these dynamics will require careful planning to overcome any obstacles and to get the parent bank sign-off, whilst ensuring international banks comply with the deadline set out by the prudential authority.

For UK branches this will be even more difficult. Few have sufficient latitude in their local authority in order to drive a climate risk strategy, instead operating to the parent bank rules. If the parent bank is not focused on climate, there is little that they can realistically do.

However, what this does mean is that all UK based banks will be considering climate risk and so the impact of encouraging green activities and discouraging non-green ones should be all the greater. The impact will be greater still as and when other jurisdictions enforce climate risk requirements.

How we can help

We have been playing an active role in advising International banks and financial institutions, helping them to develop a climate-related risk management strategy and framework in line with the requirements set out by the PRA in 2019. Our ESG and Climate Change team advises international banks, branches and subsidiaries in the UK, on best practice and provides assurance on:

Climate change governance and strategy.
Climate change risk management and mitigation strategies, risk appetite and scenario analysis.
Scope 1, 2 and 3 GHG emissions and related risks.
Policies and procedures and due diligence controls for managing climate change risk.
Management information, data, metrics, thresholds and targets for managing climate related financial risk and opportunities and monitoring capabilities.
Disclosures and reporting.

If you have any queries on the services that we provide please do not hesitate to contact a member of our team.