Prudential Regulation and Climate Change

Abstract

Prudential regulators seek to ensure that the institutions (banks, insurers, pension schemes) making financial promises to their customers are capable of meeting those promises. Over time that has caused them to take an increasingly holistic view of the risks faced by those entities. It should be no surprise, therefore, that risks caused by climate change have emerged over the past decade as requiring concerted attention, both from the institutions and the prudential regulators who supervise them. Institutions and prudential regulators urgently need to design frameworks and processes that capture and assess the risks from climate change in a way that is tractable, rigorous and capable of integration into their existing frameworks and processes. This paper maps briefly how the practice of prudential regulation has evolved in recent years across a number of major jurisdictions (the United Kingdom, the European Union, Australia, South Africa and Singapore) to engage with the risks from climate change. This has value in its own right. Climate change is the most urgent existential risk currently facing mankind. However, the analysis in this article also provides a case study of how prudential regulation itself needs to be conceived, and in particular the need for prudential regulators to be ready continually to address nascent types of risk, the precise dimensions and nature of which emerge only over time.