The PRA’s updated supervisory expectations for managing climate-related risks: what this means for banks and insurers

For a long time, both the PRA and FCA have recognised that climate change is a potential material financial risk to regulated firms. On 30 April 2025, the PRA published a consultation paper (CP10/25) setting out proposed updates to its supervisory expectations regarding banks’ and insurers’ approaches to managing climate-related risks, together with a draft supervisory statement updating SS3/19. 

The PRA’s view is that since SS3/19 was published in 2019, banks and insurers have taken concrete and positive steps to improve their climate risk management capabilities, but progress is uneven and more needs to be done to meet the PRA’s expectations. Firms have also asked the PRA to provide more clarity on its expectations. 

As David Bailey, the PRA’s Executive Director for Prudential Policy, emphasised in a speech at the Climate Financial Risk Forum on 30 April 2025, these are expectations, not rules. Furthermore, they are enhancements to the expectations set out in SS3/19 rather than a change of direction in the PRA’s approach to climate risk. They consolidate existing guidance and reflect developments in international standards. Nevertheless, they are likely to impose additional burdens and compliance costs on firms, though these should be more limited for firms that have been keeping up to date with developments.

Climate-related risks 

The consultation paper explains that climate-related risks affect banks and insurers through two main channels: physical risks and transition risks. For banks, both risk types can impact their lending and investment portfolios. For insurers, physical risk can damage their assets or properties, resulting in lower asset values or increased claims, and is particularly relevant to general insurers, while transition risk can manifest through lower insurance premiums from carbon-intensive sectors or repricing of carbon-intensive assets, with the biggest impact on life insurers.

The PRA notes that these risks are systemic; while both types of risks are foreseeable, they are also uncertain in both scale and timing. However, the magnitude and distribution of the future risks will be determined by the actions that banks and insurers take now, before it is too late.

Supervisory feedback on climate-related risk management 

Following the publication of SS3/19, the PRA said in a Dear CEO letter that it expected firms to have embedded their approaches to managing climate-related financial risks by the end of 2021. It set out some examples of good practice as well as gaps between firms’ intentions and its expectations. It followed this up with subsequent Dear CEO letters in 2022 and 2024 in which it observed that firms were making progress, but there was still work to do. The PRA has also published Dear CFO letters with thematic findings on accounting capabilities for climate risks, which set out the PRA’s views on ways that firms can develop their capabilities to capture the impact of climate-related risks on balance sheets over time, consistent with SS3/19.

In the consultation paper, the PRA notes that most banks have still not established climate-related risk metrics or defined a climate-specific risk appetite. Although many banks have started trying to manage the reputational risk associated with financing carbon emissions, they are failing to adequately assess their exposure to other climate-related risks. Firms have yet to fully operationalise scenario analyses, and none is currently able to design scenarios that fit their business case. Where firms have started to do scenario analysis, they are usually qualitative or based on expert judgment, whereas a quantitative approach would be more effective.

In the insurance sector, the PRA says that while most insurers include some climate-related risks within their risk-appetite statement, their risk management processes are still at an early stage of development. Insurers are unable to measure and monitor climate exposures against their risk appetite, and those who see climate-related risk as a driver of existing risk rather than a standalone risk evidence little or no climate-related risk appetite statement or threshold. While most insurers run several climate scenarios, results are not being used in decision-making. The PRA has also found that some insurers have gaps in their capabilities, data and tools, which means that scenarios do not reflect the full range of risks to which they are exposed.

The PRA’s proposals 

The consultation paper consolidates the guidance set out in the Dear CEO and Dear CFO letters noted above, as well as other guidance that the PRA has issued to date. It also reflects improvements in the understanding of climate-related risks as well as the development of international standards since 2019. 

The PRA acknowledges that firms may need to take additional actions to comply with the updated expectations. However, it expects the framework to be applied proportionately. Firms will need to take the following two steps to determine how best to manage climate-related risks:

• First, firms should identify the climate-related risks they are exposed to and assess how these risks could impact their business model over appropriate time horizons and under different climate scenarios. This process should be supported by relevant scenario analysis.
• Second, firms should develop a risk management response that is proportionate to their vulnerability to climate-related risk. Firms with more material exposures will need to take greater action.

Firms should be prepared to evidence and explain how they reached the judgments underpinning the outcomes arising from these two steps.

In light of the more detailed expectations, the PRA is proposing to structure the revised supervisory statement into seven chapters, rather than the current four: 

• Governance: The PRA proposes to add detail and clarity to the existing expectations to help firms make further progress in establishing appropriate governance structures for climate-related risks. This includes new expectations to ensure that a firm’s strategy is consistent with its climate targets, as well as establishing the internal controls environment. The PRA also provides more detail on the corporate governance structures needed to manage climate-related risks.
• Risk management: The PRA proposes to introduce clearer expectations regarding each element of the risk management framework and clarify how existing PRA policies related to risk management generally should be applied to climate-related risks. The PRA expects firms to use a structured approach to develop metrics and limits to monitor and manage these risks. The proposals also seek to ensure that the management body receives appropriate risk reporting.
• Climate Scenario Analysis (CSA): The PRA proposes to enhance existing expectations with additional detail to give firms clearer guidance, reflecting the improvement in knowledge and modelling capabilities as well as international standards. The expectations focus on use cases and objectives of the CSA and are designed to encourage firms to develop their CSA capabilities over time.
• Data: The PRA recognises that data gaps remain a significant challenge. The proposals are intended to enable firms to explain how they identify and assess data gaps and reflect the consequent uncertainty in their assessments when setting risk appetite and developing risk management tools. The revised expectations are consistent with the guidance set out in the PRA’s Dear CEO and Dear CFO letters as well as the Basel Committee on Banking Supervision’s Principles for the effective management and supervision of climate-related financial risks.
• Disclosures: The PRA does not propose to make any substantive changes to its expectations on disclosures. The only proposed update is to remove a reference to the Task Force on Climate-related Financial Disclosure (TCFD) recommendations, which have been incorporated into the International Sustainability Standards Board (ISSB) standards. The PRA will replace it with a reference to UK Sustainability Reporting Standards (SRS), which the UK government is developing based on the ISSB standards.
• Banking-specific issues: The proposals in this chapter contain expectations on aspects of climate-related risk management that are specific to banks. In particular, they provide clarity on how to apply existing PRA policies and expectations related to financial reporting, the Internal Capital Adequacy Assessment Process (ICAAP), the Internal Liquidity Adequacy Assessment Process (ILAAP), credit risk, market risk, and reputational risk for climate-related risks.
• Insurance-specific issues: The proposals in this chapter set out in more detail the PRA’s expectations of how insurers should include climate-related risks in their risk management frameworks, in their own risk and solvency assessment (ORSA) in the calculation of their solvency capital requirement (SCR), and in preparing their Solvency II balance sheet. The proposals also clarify existing expectations connected with climate-related risks and build on the proposals in previous chapters on risk management and the use of scenario analysis.

Next steps

The deadline for responses to the consultation paper is 30 July 2025, and, if adopted, the policy will take immediate effect upon the publication of a final supervisory statement, though firms will be given a transition period of six months from publication to adapt to the updated expectations. During that time, supervisors will not ask firms to evidence the steps they are taking to comply with the updated expectations, but firms should continue to appropriately manage climate-related risks during this period.