PRA Publishes its Final Updated Supervisory Statement on Managing Climate-Related Risks

The PRA has published a Policy Statement alongside the final text of SS25/5 – Enhancing banks’ and insurers’ approaches to managing climate-related risks. This Policy Statement builds on its expectations set out in 2019 (SS3/19), and follows a consultation earlier this year.¹ The PRA notes that overall sentiment to its proposed changes was positive, but some amendments have been made following the responses received in order to provide greater clarity and detail.

The PRA sets out that its approach recognises that its policy is not prescriptive but will be implemented proportionately by firms in line with the materiality of climate-related risk exposure, which will be driven by factors such as size, business model and geographical exposure. The policy allows firms to tailor their actions and risk management solutions to their business operation without undue burden. The PRA also recognises that climate change is an area where practice is still evolving.

Responses to the proposals and changes since the consultation stage

The proposals included the following:

• Strengthening governance arrangements, and ensuring that firms’ boards and senior management are engaged in overseeing climate related risk.
• Enhancing risk management frameworks to ensure climate-related risks are integrated across all risk types.
• Requiring firms to demonstrate how scenario outputs inform business decisions, using a climate scenario analysis (CSA) as a strategic tool to assess resilience under different climate pathways.
• Improving quality and use of data, by critically assessing data sources and addressing gaps in coverage.
• Providing disclosure in line with international standards and transparent decision-useful information to stakeholders.
• Insurance-specific proposals, such as incorporating climate-related risks into the Own Risk and Solvency Assessment (ORSA) and stress-testing frameworks.

The responses to the consultation, and changes to the final Supervisory Statement include the following:

• The addition of an overarching considerations section to explain the policy intent behind the PRA’s expectations, and explaining the proportionate application of these expectations. It is clarified that the aim of the policy is to promote effective risk management practices, and that it is in the interests of firms to ensure robust assessment and monitoring of climate-related risks in a proportionate way. The suggestion that case studies or examples should be included in the policy was rejected by the PRA, on the basis that they may become rapidly outdated, and best practice will vary over time in this developing area.
• The PRA has determined that firms can apply judgement to categorise litigation risk in a way that best reflects their business and profile (whether that is a subset of physical and/or transition risk or a distinct transmission channel). This follows some respondents highlighting the growing complexity of climate litigation and the expanding avenues and strategies being deployed by claimants. The PRA says that multiple responses noted that litigation risk has the potential to be a major source of risk for banks and insurers. 
• The PRA has clarified that firms may integrate climate-related responsibilities into existing governance frameworks, and integrate climate-related risks into existing risk registers or use supplementary risk registers, in both cases if risk identification remains robust. The expectation to include all material climate-related risks in risk registers, the PRA says, is core to the aims of the policy, but the PRA intends to be principles-based, not prescriptive, in delivering this.
• Significant numbers of responses sought clarity and guidance on the role of climate scenario analysis (CSA). The PRA proposals aimed to improve firms’ calibration and design of CSAs to better tailor for specific use cases and to take account of their limitations in decision making.
• Respondents raised the challenges in quality and consistency of relevant data sources. A wide range of sources are used, such as emissions data using satellite observations, expert forecasting, and the output of complex models, such as climate and economic projections. Queries were raised as to whether the PRA could help, for example by reviewing sources or promoting shared collaborative efforts and shared repositories. The PRA stated that firms are expected to take responsibility for sourcing the data necessary to manage climate-related financial risks, and remain cognisant of that data’s limitations, uncertainties, key assumptions and limitations. The PRA intends that setting clear expectations for use of data will incentivise improvements in data and transparency from data providers.
• There was support for the PRA not introducing new disclosure requirements at this time, and instead reaffirming its expectation that firms engage with wider initiatives on climate-related risk disclosures. The PRA received some requests to provide more information on its expectations for specific aspects of climate-related disclosures, such as transition plans. However, the PRA indicated that it continues to engage with other bodies to encourage high-quality disclosures in the context of corporate reporting, and will not duplicate this work.
• The PRA has clarified that existing rules regarding Solvency Capital Requirements (SCR) provide sufficient flexibility to take account of climate-related risks in a way the insurer in question considers appropriate, and there is no requirement for a separate or new climate risk capital assessment. The inclusion of CSA as part of the Own Risk and Solvency Assessment (ORSA) is intended to help firms further with assessing and reflecting the characteristics of climate-related risks

A number of respondents noted that the PRA excluded nature risk from its proposed policy. In response, the PRA stated that it has not set specific expectations on nature-related risks but that it does expect firms to manage all financial risks to which they are exposed. Further, some commentators raised that the policy does not address double materiality, i.e. that firms should assess not only how climate-related risks impact their financial position, but how their activities contribute to climate outcomes. The PRA’s response is essentially that this is not within the PRA’s role as a prudential regulator.

Future steps

The new Supervisory Statement is in force from 3 December 2025. Firms have six months for reviewing their current status in meeting the expectations in the policy and to carry out a gap analysis, but are not required to close the gaps in that time. Supervisors may ask for evidence of this, but will not do so until the six months have ended. 

Footnote:

1. Our article on the consultation is available here: PRA Publishes Consultation on Updating the Approach of Banks and Insurers to Managing Climate-Related Risks | HFW