Legal & Regulatory News

Prudential Regulation Authority publishes speech on capital requirements and climate

On 25 May 2022, Sam Woods of the Prudential Regulation Authority (the PRA) gave a speech on capital requirements and climate change. In this speech, Woods noted that the PRA maintains the view that capital is not the best tool to directly address the causes of climate change, for example subsidising green assets by reducing capital requirements or increasing them to penalise carbon-intensive ones.

Woods brings to attention the issue of assessing the effectiveness of the capital regime in capturing climate risk, noting potential 'regime gaps' where aspects of the capital framework do not cover climate risks adequately. As well as these, 'capability gaps' are highlighted as the instances where firms and regulators do not have data or modelling abilities to capture climate risks.

The speech was given in light of the Bank of England's 2021 Climate Biennial Exploratory Scenario (CBES) results and Woods explains that the CBES results show climate risk as a first-order strategic issue for firms, but the magnitude of transition costs need recalibration.

Click here to view the speech.