The UK’s Prudential Regulation Authority (PRA) has issued a consultation paper (CP10/25) outlining proposed updates to its supervisory expectations for banks and insurers regarding the management of financial risks stemming from climate change. This follows requests from firms to the PRA to give further clarity around what it expects them to do to manage the effects of climate change.

This consultation, which closes on July 30, 2025, aims to replace the existing Supervisory Statement (SS3/19) with a more detailed and comprehensive framework that reflects the evolving understanding of climate-related risks and international standards.

Building on existing frameworks

The PRA initially set out its expectations for firms on climate change in 2019. Since then, the regulator acknowledges that firms have made progress in building their climate-related risk management capabilities. However, this progress has been uneven, and the PRA believes further work is necessary to ensure the financial system is resilient to the increasing threats posed by climate change.

The new consultation paper seeks to provide clearer, more straightforward, and concise expectations for firms. These are not intended as entirely new rules but rather as explicit enhancements and clarifications of existing expectations.

Areas of focus

The consultation paper emphasizes several key areas that the PRA expects firms to strengthen in their approach to managing climate-related risks:

• Governance: The PRA stresses the importance of the board setting and owning the overall business risk appetite for climate risk. This includes providing effective challenge on climate-related issues and ensuring regular review of the firm’s risk appetite, climate-related risk management practices, and strategy. The proposals also highlight the need for appropriate training for board members on climate-related risks.
• Risk management: Firms are expected to integrate climate-related risks into their overall risk management frameworks. This involves a structured risk identification and assessment process to identify material climate risks and appropriately classify them in the firm’s risk register. The PRA also emphasizes the development of quantitative risk appetite metrics and limits for each material climate-related risk. For banks, where material, the incorporation of climate risks into liquidity buffers and credit risk management frameworks is also expected.
• Climate scenario analysis: A significant emphasis is placed on the rigorous use of scenario analysis. Firms should develop an appropriate understanding of the climate scenario analysis models and toolkits they use and be able to justify their chosen scenarios. The PRA expects firms to select, match, and tailor scenarios relevant to their objectives and specific use cases, using the outputs to actively inform business decisions. Scenario analysis should also be integrated into the Internal Capital Adequacy Assessment Process (ICAAP) or Own Risk and Solvency Assessment (ORSA). Firms should regularly review and update their scenarios in line with evolving modelling and scientific advancements.
• Data and exposure visibility: The PRA underscores the need for firms to enhance their understanding of where and how they are exposed to climate risks at both asset and portfolio levels. This includes improving data capture on asset locations and emissions profiles.
• Integration of climate goals: Firms should be able to demonstrate how they have integrated their plans to meet any voluntarily adopted or legally required climate goals into their risk management frameworks.

Proportionality and engagement

The PRA recognizes that climate-related risk management is an evolving and challenging area. The proposed expectations are intended to be applied in a proportionate manner, scaling to the risks to which a firm is exposed. The PRA also plans to actively engage with industry groups to help firms collectively develop and advance best practices in this area.

Overall aim

The consultation closes to comments on July 30, 2025 and the draft supervisory statement will replace SS3/19 upon finalization.

The overarching aim of this consultation is to ensure that banks and insurers have robust and forward-looking approaches to managing the financial risks arising from climate change. By setting out clearer and more detailed supervisory expectations, the PRA seeks to build a more resilient financial system that can withstand the increasing frequency and severity of climate-related events and support the transition to a more sustainable economy.