By Kareline Daguer, Partner at PwC
However, in most countries PPE was not stocked up in significant quantities, nor were there plans to establish a rapid testing and tracing programme or a holistic understanding of the knock on consequences on the economy. What can we learn from that?
I personally am very keen to see the links between pandemic preparation, analysis and what firms are currently doing to manage and mitigate the financial risks related to climate change. Climate change has become a buzzword in recent years but how much meaningful preparation has it really driven? Last year the Prudential Regulation Authority published Supervisory Statement 3/19 marking a first concrete step in asking firms to take tangible actions towards formalising their approach to climate related financial risks. One year on, on 1st of July 2020 the PRA issued a Dear CEO letter outlining its new revised expectations. Firms are expected to have a fully embedded approach to managing climate related financial risks by the end of 2021. The letter was published to coincide with the publication of the Climate Financial Risk Forum (CFRF) Guide - this industry forum is co-chaired by the PRA and the FCA and its objective is to share best practice.
I believe the PRA is right in building up a sense of urgency into preparations since such pressure might spur firms into action and help achieve the desired outcomes. But I think firms need to think even bigger and really own this challenge. It’s not just a regulatory issue- there is a genuine risk that there is an impact on the whole of society at some point.
In its Dear CEO letter the PRA highlights four key areas of focus: governance, risk management, scenario analysis and disclosures. Although the four areas are important I believe scenario analysis should be the central cog in the climate change risk wheel.
Identifying and developing the most relevant scenarios that impact each firm will allow management to feed the insights gained into its strategy and decision making.
This is expected to be an iterative process and examples of good practice may include: choosing a range of scenarios that cover shorter and longer term horizons; using core scenarios to shape strategy whilst using tail scenarios to inform the limits to risk appetite and help draw up necessary mitigation strategies; and using reverse stress tests to help understand whether climate related causes may cause the firm to fail in certain scenarios. This is where the importance of the exercise becomes obvious, not just to make sure that the firm is doing what the regulator expects but to ensure it will be prepared when some of these scenarios start becoming a reality.
Developing an integrated approach to scenario analysis in the next 18 months requires significant technical expertise and use of tools, in order to embed it in this timeframe will require firms to start making a more concerted effort today.
As demonstrated by this pandemic, a wait and see approach, ticking boxes and looking at the issue with the objective to keep the regulators happy could be a very costly mistake. The impact of climate change and the transition to a low carbon economy might end up being more or less severe but one thing is certain: preparing for it by developing the knowledge and expertise needed will mean we will all be better off in the long run, we should embrace the challenge.
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