The PRA should integrate nature loss into climate risk supervision and strengthen enforcement provisions

In response to the Bank of England’s consultation paper on ‘Enhancing banks’ and insurers’ approaches to managing climate-related risks’, Global Canopy recommends the PRA integrates nature loss into its supervision and strengthens enforcement provisions

Global Canopy has submitted a formal response to the Bank of England’s consultation paper on ‘Enhancing banks’ and insurers’ approaches to managing climate-related risks’.

The consultation paper sets out a proposal by the Prudential Regulatory Authority (PRA), which is part of the Bank of England, for updated supervisory expectations for banks and insurers in the UK. The PRA’s proposals are intended to help UK banks and insurers manage the effects of climate change on their businesses, and thereby maintain the essential services they provide to the economy.

We make two key recommendations for amendments to the statement in our response to the paper. 

Read Global Canopy’s full response to the Bank of England’s consultation paper

Recommendation 1: The PRA should integrate nature loss into its supervision

The PRA’s proposal assumes that climate change acts alone in causing acute, chronic and tipping point events, overlooking the intensification of systemic risk caused by nature loss. In fact, risks additionally depend on firms’ and economies’ exposure to nature loss and the state of nature in those areas. Nature loss and climate change should be examined both together – to ensure that interactions between them are fully accounted for – and in isolation from each other – to ensure that nature-specific data and modelling challenges are addressed.

The PRA should follow the Network for Greening the Financial System’s guidance and ensure that nature loss and its exacerbating effects are properly taken into account in banks’ and insurers’ risk assessments. Similar to climate change, nature loss should be embedded in governance, risk management, climate scenario analysis, data, disclosures and entity-specific requirements. Our response outlines how other regulatory institutions worldwide, including the European Central Bank (ECB), have already taken significant steps in this direction, and that we recommend the Bank of England should follow their lead.

Recommendation 2: The PRA should strengthen enforcement provisions

Without clear enforcement measures, the PRA’s supervisory climate and nature requirements will be ineffective. There are strong precedents of other regulators applying more robust enforcement, linked to time-bound requirements. These include banks under the supervision of the ECB receiving binding supervisory decisions in 2023 for failing to include climate and nature-related risks in materiality assessments, with some warned of periodic penalty payments (such as one-day breach fines) if issues remained unresolved by specified deadlines. 

Nature loss increases the likelihood and intensity of climate change-related events

As evidenced by the ‘Evidence review on the financial effects of nature-related risks’ paper – released by Global Canopy, the Taskforce on Nature-related Financial Disclosures and the University of Oxford last month – and a number of other scientific and academic reports, all the risks highlighted in the Bank of England’s statement are exacerbated by nature loss. Critically, nature loss also influences the geographical spread of those risks – locations more impacted by nature loss are more exposed to acute and chronic events. 

The Bank of England should follow the ECB’s lead

“While the Bank of England’s statement offers improved clarification on banks’ and insurers’ responsibility to assess and respond to climate change risks, it should be updated to integrate nature loss into the PRA’s climate risk supervision and to strengthen its enforcement provisions. There’s potential for the Bank of England to become on a par with the ECB by integrating nature loss and bulking up enforcement among UK banks and insurers.”

Dr Natacha Postel-Vinay, Technical Nature-Related Finance Lead at Global Canopy

Read Global Canopy’s full response to the Bank of England’s Consultation Paper ‘CP10/25  Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19’.