It has been a busy week for central banks and regulators when it comes to their giving definition to supervisory expectations in respect of the management of climate-related risks. First, Monday saw a speech given by Sarah Breeden, Executive Director, International Banks Supervision, Bank of England in which she underlined that while climate risks may seem abstract and far away they are in fact ?very real, fast approaching, and in need of action today?. In this she recounted the Bank's assessment that financial risks from climate change manifest themselves through two channels - more immediate physical risks and transition risk. In terms of physical risks, inflation-adjusted insurance losses from catastrophic weather events have increased fivefold in recent decades. Transition risks stretch into the future, but are beginning to materialise with credit risks associated with the transition to the low-carbon economy most visible in the automotive and energy sectors. The risks are far-reaching in breadth and scope, correlated and non-linear, and occur on a greater scale than other risks. But they can be mitigated through an early and orderly transition of the financial system provided we now begin to take real steps.

The speech coincided with the publication by the Prudential Regulatory Authority (PRA) of its supervisory statement ?enhancing banks? and insurers? approaches to managing the financial risks from climate change?. As set out in the consultation draft, expectations cover governance, risks management, scenario analysis and disclosure, with supervisors looking to firms to take a strategic approach, led by the Board and with clear accountability.  The PRA has deliberately not been prescriptive in its expectations, recognising that the understanding of the risk remains immature and that further development work is needed. The PRA has signalled, however, that over the course of the next year or so, as tools and expertise improve, it will embed more granular requirements into its policy. Central to this will be the deliberations of the newly formed UK Climate Risk Forum (CFRF) in which the PRA and FCA will work together with industry participants to develop best practice.

The policy statement accompanying the supervisory statement provides feedback on issues raised in response to the consultation, including by UK Finance. While the PRA acknowledges the need for proportionality and for expertise to grow over time, the final statement confirms that the requirements are generally applicable and that UK prudentially supervised firms are in scope and will need to have assigned Senior Management Function responsibilities and have submitted the paperwork by 15 October. The supervisory statement makes clear that it expects all firms within the scope of the supervisory statement to work with the grain of the recommendations of the Financial Stability Board-sponsored Taskforce on Climate-related Financial Disclosures (TCFD), in the first instance disclosing how climate-related financial risks are integrated into governance and risk management processes, including the basis for determinising whether these risks are considered material or principal risks.

We have since seen the publication of a report by the Network for Greening the Financial System (NGFS). The network now comprises 34 central banks and supervisors drawn from five continents, economies responsible for half of global greenhouse gas emissions and with supervisory responsibility for two-thirds of global systemically important banks and insurers. This seeks to translate commitments into concrete actions. The report calls on central banks and supervisors and the financial community to deliver on four recommendations: to integrate the monitoring of climate-related financial risks into day-to-day supervision, financial stability monitoring and board risk management; for central banks to lead by example by integrating sustainability into their own portfolio management; to work together to help bridge data gaps; and to build in-house capacity and share knowledge with other stakeholders on the management of climate-related financial risks. It then calls on policymakers and supervisors to put their shoulder behind the disclosure recommendations of the TCFD and to support the development of a taxonomy of economic activities to facilitate risk assessment and the mobilisation of capital for green and low-carbon investments consistent with the Paris Agreement. Speaking at the conference to launch the report, Mark Carney, governor announced that the Bank of England will disclose how financial risks from climate change are managed across its entire operations in 2020 as part of its 2019/2020 annual report.

The NGFS report was profiled in an open letter from Mark Carney, governor of the Bank of England, François Villeroy de Galhau, governor of the Banque de France and Frank Elderson, NGFS chair published e.g. in yesterday's Guardian. As this concludes: ?As long as temperatures and sea levels continue to rise and with them climate-related financial risks, central banks, supervisors and financial institutions will continue to raise the bar to address these climate-related risks and to ?green? the financial system. We need collective leadership and action across countries and we need to be ambitious. The NGFS is the core of the response of central banks and supervisors. But climate change is a global problem, which requires global solutions, in which the whole financial sector has a role to play.?