PRA sets new climate risk management standard for banks and insurers

What does this mean?

The PRA confirmed its updated expectations for how banks and insurers should manage climate-related financial risks, building on and replacing SS3/19.  Please see our At a glance for further information on what was proposed by CP10/25. The final policy incorporates changes in response to industry feedback on CP10/25.

The new expectations retain the previous scope for SS3/19 but include significantly more detailed guidance on implementation, providing significantly more granular guidance on implementation across all existing pillars - governance, risk management, scenario analysis, data and disclosures. The updated statement also introduces strengthened and more explicit expectations on data as well as introducing sector-specific requirements.

Industry feedback: Respondents broadly welcomed the PRA’s direction and viewed the proposed rules as a pragmatic step toward maturing climate risk supervision. They supported the consolidation of previous supervisory insights into a single statement but stressed the importance of proportionate application. Respondents to the consultation requested clearer distinctions between mandatory expectations and illustrative guidance, particularly for smaller firms.

Firms also emphasised the need for flexibility in governance arrangements, clarity on how to embed climate risk into existing risk frameworks, and recognition of implementation challenges such as data limitations and modelling costs.

Amendments to draft policy: The PRA has refined some of its proposed expectations to support clearer and more proportionate application, with most adjustments being clarificatory in nature. Key updates include:

• Proportionate application: The PRA has introduced an “Overarching aims” section to provide clearer guidance on how firms should apply the policy in a proportionate way, reflecting both the materiality of their climate-related risks and the scale and complexity of their operations. This includes confirming that quantitative climate scenario analysis (CSA) is expected only where climate risks are significant, with qualitative approaches acceptable for immaterial exposures. The PRA also points to the Climate Financial Risk Forum as a useful resource for practical implementation support. 

• Governance: The PRA has indicated that firms can assign climate-related responsibilities within their current governance arrangements, rather than developing separate structures, as long as this setup continues to enable effective risk identification.

• Risk management: Firms may choose to record climate-related risks within their current risk registers or manage them through additional sub-registers, depending on which approach better supports effective identification and oversight. The PRA also highlights that the ‘accept, manage, avoid’ terminology is optional rather than required. In addition, the PRA has made small adjustments to its operational resilience expectations to ensure consistency with SS1/21  Operational resilience: Impact tolerances for important business services.

• Climate scenario analysis (CSA): The PRA has clarified that firms should align the number and type of CSA exercises with the scale of their climate-risk exposures. The policy has also been updated to allow firms to choose between reverse stress testing,  scenario-based sensitivity analysis, or using both approaches. For longer-term horizons, the PRA notes that it is acceptable for firms to rely more on narrative-based scenarios, with less focus on precise quantification.

• Data: The PRA has amended its expectations so that firms are now required to understand, rather than quantify, data uncertainty. It has also revised its position on proxy use, confirming that firms are no longer expected to use conservative proxies when data or models are incomplete. Instead, firms should select proxies they judge appropriate and remain aware of their limitations.

• Categorising climate-related litigation risk: Firms can exercise judgement in determining how this risk is classified so that it best reflects their business and risk profile, including the option to treat it as a separate transmission channel.

• Clarification of the six-month review period: The regulator says this review period is not an implementation period. By 3 June 2026, firms are expected to have completed an internal assessment of their current alignment with SS5/25, identified where they fall short, and agreed a ‘credible and ambitious’ plan to address those gaps. Supervisors will only begin requesting evidence of internal reviews and action plans after the six-month period has ended.

With regards to sector specific clarifications and amendments, the PRA said that:

For banks, the PRA confirmed that the climate scenario horizons used within the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) can be set in line with the usual timeframes for those assessments, with longer-term climate scenarios used to support broader strategic planning. 

The PRA also recognised ongoing data and capability constrains in relation to financial reporting but reiterated that its expectations remain consistent with accounting and audit standards.

For insurers, the PRA clarified that the Solvency Capital Requirement (SCR) framework provides insurers with flexibility to reflect climate-related risks in a way that suits their business, and that for firms using internal models, these risks may act as drivers across different SCR components. 

In the context of credit ratings used for the regulatory balance sheet, the PRA has clarified that where a firm considers a credit rating agency’s rating does not adequately reflect certain risks, including climate-related, it may apply an appropriate adjustment. 

If firms judge that market values underprice climate-related risks, the PRA clarifies that they may reflect this within their Own Risk and Solvency Assessment (ORSA) and within the SCR.

The PRA also confirmed that its cost-benefit analysis reflects only the incremental costs associated with implementing the updated expectations and not the costs of meeting the supervisory expectations already in place.

What do firms need to do?

Firms have only six months to complete the internal review required by the PRA, including a gap analysis and action plan. Work needs to begin immediately to meet the June 2026 supervisory expectation.

As part of this, firms must also undertake a materiality assessment to understand the scope and extent of the material climate-related financial risks. This assessment is needed to meet the proportionality principle in SS5/25 and can leverage work already done - for example, under the Taskforce on Climate-related Financial Disclosures (TCFD) and the Corporate Sustainability Reporting Directive (CSRD). The output from this assessment will drive the depth of response required across governance, risk management, scenario analysis and capital processes.

Given the overlap with the UK Sustainability Reporting Standards (SRS), Transition Plan Taskforce (TPT) Disclosure Framework, and, for cross-border groups, EU frameworks such as the European Banking Authority’s ESG risk management guidelines and Pillar 3 disclosures, firms should seek to build an integrated approach to climate risk and sustainability reporting rather than develop parallel processes.

More broadly, firms need to consider what operationally will be required to implement SS5/25 in a proportionate manner. They should also evaluate whether they have the necessary conceptual understanding of the PRA’s expectations for managing climate-related financial risks and the resources to successfully implement them. Careful consideration should be given the development of a detailed plan that aligns resources with timelines to bridge any identified gaps in a firm’s response to the PRA’s expectations.

Next steps

The final policy is effective as of 3 December 2025 and replaces SS3/19 in its entirety. The PRA will continue to engage with firms to facilitate effective adoption of the new expectations.