Impact tolerance and Climate transition risk: Difference between pages

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''Risk management - regulation - supervision - UK Prudential Regulation Authority (PRA) - Financial Conduct Authority (FCA).''
''Climate change - financial risks''.


The maximum tolerable level of disruption to an important business service, as measured by a length of time - in addition to any other relevant metrics.
The Bank of England defines climate transition risk as financial risks that could arise from adjusting to a lower-carbon economy.


The maximum impact tolerance level should reflect the point at which any further disruption to the important business service could cause intolerable harm to any one or more of the firm’s clients or pose a risk to the soundness, stability or resilience of the UK financial system, or the orderly operation of the financial markets.
Climate transition risks are distinct from the direct physical risks of climate change, such as more frequent and severe extreme weather events.  


''(Source - Financial Conduct Authority Handbook.)''


:<span style="color:#4B0082">'''''Climate transition risks and opportunities'''''</span>


:<span style="color:#4B0082">'''''Setting impact tolerances - Bank of England - Financial Conduct Authority'''''</span>
:* Policy and legal changes including changes relating to energy generation, renewable energy targets, sustainable land use and water efficiency.
:* Technological advancements in renewable energy, battery storage and electrification of transport, aviation and agriculture.
:* Change in demand for products and commodities, including fossil fuels and lithium, leading to market risk.
:* Reputational risk arising from shareholder, consumer or investor concerns, reflecting the transition in views regarding fossil fuels.


:"Firms and FMIs should identify specific metrics for the maximum tolerable level of disruption.
:''Actuaries Institute of Australia Climate Change Working Group.''


:These should be measures that identify: harm to consumers or market participants; harm to market integrity; threat to policyholder protection; safety and soundness; or financial stability.


:Such metrics could measure the extent of disruption, for example by including the maximum value of disruption, number of transactions, or the number of customers affected.
:<span style="color:#4B0082">'''''What are the climate transition risks?'''''</span>


:"Transition risks can occur when moving towards a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. It’s not that policies stemming from deals like the Paris Climate Agreement are bad for our economy – in fact, the risk of delaying action altogether would be far worse. Rather, it’s about the speed of transition to a greener economy – and how this affects certain sectors and financial stability.


:All impact tolerances should include the maximum tolerable duration of such disruption, taking into account the criticality of the important business service.  
:One example is energy companies. If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas.


:However, a metric based on time alone may be insufficient."
:The move towards a greener economy could also impact companies that produce cars, ships and planes, or use a lot of energy to make raw materials like steel and cement."


:''Building operational resilience: Impact tolerances for important business services - Bank of England - Financial Conduct Authority.''
:''Bank of England - Climate change - What are the risks to financial stability?''




== See also ==
== See also ==
* [[Bank of England]]
* [[Bank of England]]
* [[Business impact analysis]]
* [[Climate change]]
* [[Enterprise risk management]]
* [[Climate Disclosure Standards Board]]
* [[Financial Conduct Authority]] (FCA)
* [[Climate liability risk]]
* [[Financial Market Infrastructure]] (FMI)
* [[Climate physical risk]]
* [[Financial markets]]
* [[Climate risk]]
* [[Firm]]
* [[Climate transition]]
* [[Guide to risk management]]
* [[COP26 Private Finance Hub]]
* [[Impact]]
* [[Financial Conduct Authority]]
* [[Metric]]
* [[Financial Stability Board]]
* [[PRA Supervisory Statement 1/21 (SS1/21)]]
* [[Fossil fuel]]
* [[Prudential Regulation Authority]] (PRA)
* [[G20]]
* [[Regulation]]
* [[Greenflation]]
* [[Resilience]]
* [[Greenhouse gas]]
* [[Risk appetite]]
* [[Market risk]]
* [[Risk management]]
* [[Paris Agreement]]
* [[Risk policy]]
* [[Reputational risk]]
* [[Risk tolerance]]
* [[Stakeholder]]
* [[Supervision]]
* [[Standard Setting Body]]
* [[Stranded assets]]
* [[Task Force on Climate-related Financial Disclosures]]
* [[TCFD Recommendations]]
* [[Transition]]
* [[Transition finance]]
* [[Transition risk]]
* [[World Economic Forum]]




==Other resources==
== Other resource ==
*[https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2019/building-operational-resilience-impact-tolerances-for-important-business-services.pdf Building operational resilience: Impact tolerances for important business services - Bank of England - Financial Conduct Authority]
* [https://www.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-to-financial-stability Climate change - What are the risks to financial stability? Bank of England]
*[https://www.handbook.fca.org.uk/handbook/glossary/G3506i.html?date=2022-03-31 Financial Conduct Authority Handbook - Impact tolerance]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Compliance_and_audit]]
[[Category:Corporate_finance]]
[[Category:Financial_products_and_markets]]
[[Category:Financial_products_and_markets]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_reporting]]
[[Category:Risk_frameworks]]
[[Category:Risk_frameworks]]
[[Category:The_business_context]]

Revision as of 22:12, 4 August 2024

Climate change - financial risks.

The Bank of England defines climate transition risk as financial risks that could arise from adjusting to a lower-carbon economy.

Climate transition risks are distinct from the direct physical risks of climate change, such as more frequent and severe extreme weather events.


Climate transition risks and opportunities
  • Policy and legal changes including changes relating to energy generation, renewable energy targets, sustainable land use and water efficiency.
  • Technological advancements in renewable energy, battery storage and electrification of transport, aviation and agriculture.
  • Change in demand for products and commodities, including fossil fuels and lithium, leading to market risk.
  • Reputational risk arising from shareholder, consumer or investor concerns, reflecting the transition in views regarding fossil fuels.
Actuaries Institute of Australia Climate Change Working Group.


What are the climate transition risks?
"Transition risks can occur when moving towards a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. It’s not that policies stemming from deals like the Paris Climate Agreement are bad for our economy – in fact, the risk of delaying action altogether would be far worse. Rather, it’s about the speed of transition to a greener economy – and how this affects certain sectors and financial stability.
One example is energy companies. If government policies were to change in line with the Paris Agreement, then two thirds of the world’s known fossil fuel reserves could not be burned. This could lead to changes in the value of investments held by banks and insurance companies in sectors like coal, oil and gas.
The move towards a greener economy could also impact companies that produce cars, ships and planes, or use a lot of energy to make raw materials like steel and cement."
Bank of England - Climate change - What are the risks to financial stability?


See also


Other resource

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