• BCMstrategy, Inc.

Measuring Climate Risks and Scenario Analysis

Three days ago, our QOTD post noted that a massive 200+ set of best practice summaries regarding climate risk measurement, risk management, and disclosures provided advance notice of policymaker interest in "nudging the market to provide far more structured and comprehensive data regarding climate risk exposures despite the pandemic."

Policymakers in London today moved past the gentle nudge. A formal supervisory letter from the Prudential Regulation Authority makes clear that financial institutions will be required to measure...and hold capital against....climate-related financial risks by year-end 2021:

Moreover, the regulatory authority indicates that bank scenario analysis processes are deficient in this area.

While data gaps render these deficiencies unsurprising, they are not viewed by regulators in London as an excuse for not conducting such tests. Fortunately, as noted in this post on our sister site recently, PolicyScope data can provide meaningful tools and alternative data to help risk managers measure and manage a broad range of public policy risks (including shifts in regulatory standards to address climate exposures) more effectively.

Looking ahead, financial institutions in the UK face a challenging 2021.

They will be required to transition fully into using market-based benchmarks for pricing (the LIBOR transition) at the same time that they must implement these climate-related regulatory priorities and manage the first year of a post-EU market reality...all while addressing whatever lingering risks and losses may remain from the COVID19 pandemic and pivoting towards the final elements of the delayed Basel 3 implementation.


This development was discovered using the PolicyScope Platform. The platform -- and a companion daily analytical report powered by platform data -- are available to individual users from our website. Subscribe today at: https://www.policyscope.io/about.

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