UK PRA Consultation Paper on managing climate-related risks: enhancements to expectations, not new rules

What has been published?

On 30 April 2025, the PRA published a Consultation Paper (CP10/25) proposing the replacement of its existing Supervisory Statement on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (SS3/19) with a new Supervisory Statement setting out updated, more detailed supervisory expectations on this topic. The proposed expectations focus on the following five themes: governance, risk management, climate scenario analysis, data and disclosure. 

Alongside publication of the Consultation Paper, David Bailey (Executive Director of Prudential Policy at the PRA) also gave a speech at the Climate Financial Risk Forum on 30 April commenting on the proposals.  

The consultation is open until 30 July 2025. 

Background

The PRA first set out expectations for firms on climate change in 2019. Since this point, the PRA explains, firms have begun to build their climate-related risk management capabilities but progress on this has been uneven and further work remains. The PRA also notes that the industry has expressed a desire for greater clarity and detail on its expectations. 

As a consequence, through its current proposals the PRA is aiming to build on SS3/19 and set out clear and concise expectations about climate-related risk identification, management and governance outcomes, whilst also continuing to provide space for firms to take action and develop innovative solutions that are most suited to their business. The proposals are also intended to consolidate existing PRA guidance (set out in reports, Dear CEO letters and Dear CFO letters) and relevant international guidance. However, as David Bailey stresses in his speech, the proposals are enhancements to previous expectations as set out in SS3/19, and do not represent a change of direction in the PRA’s approach to climate risk.

The scope of application for the proposed supervisory expectations would remain the same as for SS3/19, namely they would apply to UK insurance and reinsurance firms and groups (collectively, “insurers”), banks, building societies and PRA-designated investment firms (collectively, “banks”) but would not apply to branches. 

Both the Consultation Paper and accompanying speech by David Bailey make clear that the proposed supervisory expectations are intended to be applied in a proportionate manner, taking into account the firm’s size, business model and the geographical concentration of its balance sheet, and only applying at their fullest to firms that are most exposed to climate-related risk. This means that, as a first step, firms should carry out a risk identification and assessment to determine the material climate-related risks they are exposed to. This process will then enable firms, as a second step, to determine a risk management response that is proportionate to their vulnerability to climate-related risk.   

The PRA also makes clear that the proposals are supervisory expectations, rather than rules. Consequently, there is no reference to enforcement, either in the Consultation Paper or the speech. 

Proposals

The proposals focus on five key themes:

Governance

The PRA emphasises that it is necessary for a firm’s Board to set and own the overall business risk appetite for climate, including providing effective challenge on climate-related risk. 

In order to enable the Board to do so, its proposals include the following:

• Management bodies should provide the Board with relevant information on climate-related risks and appropriate training on climate-related risk, including on the current methods and tools used by the firm to manage risks. 
• The Board should be provided with an analysis of the performance of the firm’s business strategy under a range of climate scenarios.
• The Board should ensure there is a periodic review of the firm’s risk appetite, climate-related risk management practices and strategy. 
• Where a firm has voluntarily adopted climate goals or operates in jurisdictions with national climate targets (including the UK), it should be able to demonstrate how it has integrated its plan to meet any climate goals into its overall business strategy.
• Management responsibilities for identifying and managing climate-related risks should be assigned at an appropriate level of seniority within the organisation, such as a relevant SMF holder or Board member.

Risk Management

The PRA has identified significant variance in the quality and depth of firms’ approaches to risk management and so aims to set out clearer expectations on this in its proposals. In particular:

• Firms should periodically carry out a structured risk identification and assessment to identify the material climate-related risks they face and appropriately classify all materials risks in the firm’s risk register. Any judgements made during the risk assessment should be substantiated and recorded so as to enable appropriate challenge.
• Firms should undertake a risk assessment of climate-related risks arising from material relationships with clients, counterparties, investees and policyholders.
• Firms should develop quantitative risk appetite metrics and limits for each material climate-related risk. It is worth noting that the PRA is not itself proposing any specific risk metrics on the basis that market practice is still evolving and the appropriateness of different risk metrics will vary across firms. 
• Firms should develop an appropriate internal risk reporting infrastructure that enables regular and ad-hoc reporting of climate-related risks to the Board and relevant sub-committees. 

Climate Scenario Analysis

Recognising that Climate Scenario Analysis (“CSA”) has evolved since SS3/19 was published, the PRA is proposing to enhance its supervisory expectations in relation to the use of CSA. Its proposals include the following:

• Firms’ CSA should seek to capture all material climate-related risks. In this regard, firms should appropriately document how CSA fulfils their objectives and informs their decision-making and should be able to justify the scenarios they rely on.
• Firms should develop an appropriate understanding of the CSA models and toolkits they use to inform their effective application, including any relevant limitations.
• Specifically in relation to the scenarios, firms should select, match and tailor scenarios as relevant for their objectives and specific use cases.
• With respect to capital, firms should include CSA as part of their Internal Capital Adequacy Assessment Process or own risk and solvency assessment (“ORSA”).
• Recognising that CSA approaches continue to develop, firms should regularly review and update their scenarios in line with modelling and scientific advances.

Data

The PRA draws attention to the ongoing challenges in firms’ management of climate-related risks caused by data gaps and proposes the following:

• Where data gaps have been identified and can be remedied by further investment in data tools, frameworks and capabilities, firms should have in place strategic plans to manage and close those gaps.
• Where reliable data is still not available, firms should have in place contingency solutions that use appropriately conservative assumptions and proxies as an intermediate step.
• Where firms rely on external data providers, they should have in place an effective system of governance to oversee and integrate the data provided. Notably, whilst the PRA recognises that most firms are currently reliant on external data, it also proposes that firms should plan their strategic development of in-house data capabilities. 

Disclosure

The PRA does not propose substantial changes to its expectations on disclosures, noting that proliferation of new disclosure requirements by multiple regulators would place operational strain on firms. 

The main proposed change to SS3/19 is to replace the reference to TCFD recommendations with a reference to the UK Sustainability Reporting Standards (“UK SRS”) in order to reflect the UK Government’s proposed shift to UK SRS. 

The proposals also set out relevant banking- and insurance-specific issues, including:

• Banks: Where material and appropriate, banks should incorporate the impact of climate-related risks into their calibration of liquidity buffers and liquidity risk management frameworks. Banks should also have clear processes and policies to identify, measure, monitor and mitigate climate-related credit risks.
• Insurers: Insurers should ensure that risk appetites they have set to manage natural catastrophe, non-natural catastrophe and asset risks do not underestimate the impact of climate change. Insurers should also ensure their ORSAs include climate scenarios when climate-related risks are material.

Next steps

The consultation is currently open for responses and will close on 30 July 2025. 

If adopted, the policy will take effect immediately upon publication of the final Supervisory Statement. However, in order to provide firms with some transition time, the PRA proposes that supervisors will not ask firms to evidence work undertaken to meet the updated expectations until six months after publication of the Supervisory Statement.