PRA proposes higher bar for managing climate risks

What does this mean?

The PRA has expressed a view that whilst the industry has made progress in managing climate risk, further action is needed to identify and manage climate-related risks effectively. The CP proposes stronger and more specific requirements than SS3/19, whilst covering the same topics. New sector-specific expectations would also be introduced. 

To meet the proposed expectations, firms would need to embed climate-related risks into their strategy by aligning governance and decision-making processes with these risks, supported by more robust scenario analysis and strengthened climate risk framework.  

Governance: The PRA proposes that firms strengthen governance around climate risk management, including that boards explicitly set and own the firm's climate-related risk appetite, supported by clear and timely risk analysis and information from management. They also highlight accountability at senior levels, clear incentives, and embedding climate considerations into strategic planning and internal control environments, including setting risk appetite and tolerance levels for outsourced and third-party arrangements.

Under the proposals, firms would be expected to integrate any climate-related targets they have adopted into their business strategy, supported by credible plans, metrics, and risk management to track progress.

Risk Management: The PRA proposals seek to set clearer expectations across all elements of the risk management framework and to clarify how existing policies apply to climate-related risks. For example, firms would be expected to establish and review quantitative risk appetite metrics and limits for managing material climate risks, alongside regular, comprehensive internal reporting to inform senior decision-makers. 

The PRA also proposes new expectations to align a firm’s strategy with any climate targets (where adopted) and to incorporate climate risk into internal control frameworks across the three lines of defence.  

Climate Scenario Analysis (CSA): The PRA says CSA is integral to managing climate uncertainty. The proposals seek to embed CSA in firms’ risk management and support more effective decision-making. Firms would be expected to apply CSA proportionately across a range of use cases, such as business planning, setting risk appetite, and risk management approaches. Key proposals include:

• Ensuring CSA covers all material risks, with scenarios tailored to firms’ specific exposure.

• Using scenario outcomes to inform strategic and capital planning.

• Including reverse stress testing in CSA.

Data: The PRA notes that data gaps remain significant. The proposals aim to help firms explain how they identify, assess, and quantify these gaps and associated uncertainties as well as how these are reflected in risk appetite and risk management tools. The PRA proposes that firms would be expected to develop strategic approaches to address data gaps, including employing conservative assumptions and proxies as interim solutions, enhancing governance and controls over data provided externally and developing robust internal data aggregation systems.

Disclosures: While no new rules are proposed, the PRA says that it would expect disclosures to evolve with firms’ understanding of climate risks and reflect their integration into governance, strategy, and risk frameworks. The PRA also proposes changing the reference in the SS from the Taskforce on Climate-related Financial Disclosures to the UK Sustainability Reporting Standards (SRS), following formal endorsement of the SRS.

Sector-specific considerations: 

Banks would be expected to embed climate risks within financial reporting, capital adequacy, and liquidity adequacy frameworks. This would include integrating climate considerations into credit risk assessments, market risk analyses, and reputational risk management processes.

• Credit risk considerations under the proposals may include asset-level risk profiling, tightened underwriting standards, portfolio monitoring and incorporating transition risk into provisioning.

• Capital planning implications may include requiring materiality assessments, ensuring capital adequacy under forward-looking scenarios, and enhancing risk models. 

Insurers would need to embed climate-related risks across underwriting, reserving, capital, and balance sheet processes. Enhancements to risk management would also be expected, including better assessment of climate risk impact on technical provisions and asset valuations. Key proposals include:

• Own Risk and Solvency Assessments (ORSAs) to explicitly test business model viability under a range of plausible climate pathways, supported by clear management actions and governance responses.

• Solvency Capital Requirement (SCR) calculations to reflect climate-adjusted risk factors for underwriting, reserving, market volatility and counterparties’ transition risk.

• Integrating climate risk into valuation assumptions would be expected to be consistent across assets and liabilities, particularly where the Matching Adjustment is applied.

What do firms need to do?

The PRA proposes that, once the final SS is published, firms review their alignment with the updated expectations. This could include gap analyses, targeted action planning, and identifying areas where changes may be required. In the meantime, firms may wish to consider the potential uplift and how the proposals compare to current practices.

Under the draft proposals, all firms would need to assess the materiality of climate-related risks and take proportionate action where exposures are identified. Those that have already conducted materiality assessments for other regimes, such as the Corporate Sustainability Reporting Directive (CSRD), may be able to draw on that work to support implementation.

The PRA also proposes that firms assess how well business plans, capital strategies, and portfolio decisions are aligned to climate risk and that these be tested against plausible and tailored climate scenarios. This would likely require greater coordination between Risk, Finance, and Strategy functions and would bring climate stress testing in line with practices applied to other risk categories. 

Additionally, firms may wish to consider how existing work, such as transition planning or efforts to meet the EBA’s ESG risk guidelines, aligns with the direction of travel in CP10/25, particularly around embedding climate risks into the business model/ strategy and using forward-looking assessments to manage transition risks.

Next steps

The consultation closes on 30 July 2025. Final supervisory expectations will be published thereafter, with an expected six-month transition period.