Submission to Bank of England consultation CP10/25 — Enhancing banks’ and insurers’ approaches to managing climate-related risks — Update to SS3/19

This report consists of a submission by the Earth Capital Nexus initiative, hosted by the Grantham Research Institute on Climate Change and the Environment, made in response to the open consultation by the Bank of England CP10/25 — Enhancing banks’ and insurers’ approaches to managing climate-related risks — Update to SS3/19. This consultation represents an important step forward in safeguarding the stability and competitiveness of the UK financial system in the face of accelerating environmental change.  

Key messages

The response focuses on the sections of the consultation on climate scenario analysis under the following headings:

1. Reframing physical risks as immediate and potentially systemic

The authors support the Prudential Regulatory Authority’s (PRA) recognition of climate risk complexity but recommend greater emphasis on the short- and medium-term materiality of certain physical climate risks.  

2. Scenario analysis: capacity, gaps and principles

The authors welcome the PRA’s intention to strengthen scenario use and integration, and agree that embedding proportional, forward-looking scenario analysis is essential to effective risk management.

3. Ensuring firms incorporate all material climate-related risks

The submission encourages the PRA to provide clearer guidance on what constitutes a ‘material’ risk in this context — especially given the complex, systemic and non-linear nature of many climate-related risks and the evolving nature of capabilities in this area.

It encourages the PRA to set clearer expectations concerning the assessment of potential global systemic risks, particularly to systemically important firms.  

4. Providing clarity on timescales: addressing short-term volatility versus long-term structural changes

The Bank of England should set concrete expectations and supervisory actions to address financial institutions’ current focus on short-term policy and market signals and prevent volatility that could undermine financial stability. This includes mandating consideration of long-term credible scenarios into capital planning.

5. Nature-related risks under the PRA’s primary and secondary objectives.

Substantial research in the UK and internationally provides compelling evidence that nature-related risks pose clear and material threats to financial and macroeconomic stability. As such, the exclusion of nature-related financial risks from CP10/25 represents a significant blind spot.  

The PRA can help build firm capability and resilience

The PRA could publish standardised climate and nature-related ‘shock components’, including physical shocks, transition shocks and integrated climate-nature shocks. These could be modular, so firms can build composite compound scenarios from Bank of England-endorsed components while retaining flexibility to tailor to portfolios.

The Bank of England and FCA could support a Central Scenario Facility, similar to the Network for Greening the Financial System (NGFS) Climate Scenarios Hub. Such a facility could operate in collaboration with leading scientific and research institutions in the UK to ensure the highest technical standards but also operate in close collaboration with the Climate Financial Risk Forum to standardise methodology, reduce burden, and raise the floor of capability across the industry.

To support the design and implementation of such a facility, the PRA and Financial Conduct Authority should establish an Independent Scientific and Technical Advisory Group (STAG) to advise on the scenario products and put inputs into supervisory principles.