Thematic feedback from the 2022/2023 round of written auditor reporting – Climate Risks

The 2023 Dear CFO letter for Thematic feedback from the 2022/2023 round of written auditor reporting for IFRS9, emphasises the importance of identifying risks of material misstatement in the context of climate risks. This message is consistent with what was stated in 2022. The PRA focus on four key areas:

• Capabilities to quantify the impact of climate risks on expected credit losses;

• Governance and financial reporting risk assessments;

• Controls to support use of a higher volume of forward-looking climate-related data in financial reporting; and,

• Capabilities to quantify the impact of climate risks on balance sheets and financial performance.

For each area insights into observed practices are provided as well as the main areas of PRA focus for 2024 and what they see as medium-term objectives. Fundamentally the letter lays out the PRA expectations on how lenders should be looking to continue to improve their frameworks and apply quantitative measures to assess and define the climate risks. On the latter some of the good practices called out across are:

• Expansion of physical risk instruments beyond flood measures;

• Identification of borrowers most at risk and suitable adjustments made (outside the core IFRS9 model);

• Development of standardised Environmental, Social and Governance (ESG) scores using client level data to measure longer term risks;

• Enhancement of models applying a bottom up approach; and,

• Climate scenario analysis being more widely used, leveraging new internal models.

While lenders might be apprehensive about applying all potential climate risks within the IFRS9 landscape or unsure of where to initially focus – in 4most experience the outputs from climate models, such as those from the CBES exercise, should help lenders understand were the key vulnerabilities lie within their portfolio. This information should then help prioritise on how these can be incorporated into the IFRS9 framework.

In summary, the letter underlines the importance of addressing climate-related risks within financial reporting and outlines key areas of focus and recommendations for firms to enhance their capabilities in this regard. It emphasises the evolving landscape of climate-related risks and the need for firms to adapt and improve to meet regulatory expectations.

Read the letter – Thematic feedback from the 2022/2023 round of written auditor reporting