What firms need to know about the PRA’s updated expectations on climate-related risks

On 3 December 2025, the Prudential Regulation Authority (PRA) published its Policy Statement PS25/25 on managing climate-related risks, providing feedback on responses received to Consultation Paper CP10/25 (discussed in our previous blog post) and setting out its new expectations in Supervisory Statement SS5/25 (SS5/25). SS5/25 came into force on 3 December 2025, replacing previous Supervisory Statement SS3/19 in its entirety.

The PRA’s expectations apply to all UK insurance and reinsurance firms, banks, building societies and PRA-designated investment firms (firms) and represent a further step in the work to support firms’ approaches to climate-related risks. As noted in our previous blog post, the PRA has made it clear that these are expectations, not rules. We also note related developments addressed in our previous blog post on the FCA’s report on climate adaptation challenges for financial services firms.

The revisions come as the severity and frequency of climate events – through either ‘physical risks’, such as flooding or extreme heat, or ‘transition risks’, such as challenges associated with decarbonisation – continue to increase. With firms having indicated a need for further clarity, the regulator is seeking to foster ‘effective risk assessment and risk management capabilities’ and help firms make informed strategic decisions and build resilience against climate-related risks. Greater detail has been provided with respect to the proportionate application of the expectations. The updates are also aimed at achieving closer alignment with international standards and a positive impact on UK competitiveness and growth.

This blog post summarises the key expectations of the PRA set out in SS5/25.

Initial review, gap analysis and action planning

Initially, the PRA expects firms to carry out a review of their current position in meeting the new expectations within six months, i.e. by 3 June 2026. This should identify areas that require further work to ensure compliance and enable firms to develop plans for addressing any gaps. However, the PRA does not expect firms to close identified gaps within this period. To ensure a smooth transition, it will not ask for evidence of internal reviews until the six-month adjustment period has passed. 

A two-step process for a proportionate application of expectations

The PRA notes that the expectations are to be applied in a proportionate manner, considering the materiality of climate-related risks to individual firms. Firms are requested to follow a two-step process to ensure their approach properly reflects the materiality of the climate-related risks they are exposed to.

1. Risk identification, assessment and sign-off: using relevant scenario analysis, firms should identify the material climate-related risks they are exposed to and consider how these risks could impact their business model over various time periods and scenarios. The identified risks should be reviewed and agreed by the board (and reassessed on a periodic basis) and recorded in the firm’s risk register.
2. Appropriate risk management response: the firm must decide on an appropriate risk management response, considering the vulnerability of the firm’s business model to the relevant risk. Firms can scale their responses according to the materiality of the impact for the firm. 

It will be important to keep adequate records to evidence, if requested, how decisions have been made pursuant to each of these steps.

The PRA’s supervisory expectations

1. Governance

The PRA expects boards and executive management to monitor and control actual and prospective risks to the firm, including with respect to exposure to climate-related risks.

• The role of the board and executive management: boards should have a high-level understanding of the impacts of climate-related risks on the firm’s business to support timely exercise of the board’s oversight function and ensure risks are managed appropriately. Executive management needs to provide information on exposures to, and mitigation of, material climate-related risks.
• Governance structures: firms should define responsibility for managing climate-related risks within their governance structures, including by assigning responsibilities at board level, sub-committees and for executive management. An appropriately senior individual (this could be, but does not have to be, an individual holding an existing Senior Management Function (SMF)) should be assigned individual responsibility for identifying, assessing and managing climate-related risks.
• Determining risk appetite: the board should review and agree the firm’s material climate-related risks periodically, and risk appetite statements should be approved and kept under periodic review. Firms should define a risk appetite hierarchy, with relevant metrics and limits informed by an analysis of potential losses associated with various climate stress scenarios. The firm’s risk appetite statement should categorise risks by level of risk appetite, e.g. by categorising risks as ‘accept’, ‘manage’ and ‘avoid’.
• Business strategy: mechanisms should be in place for a periodic review of the firm’s strategy for addressing climate-related risks, alongside its risk management practices and risk appetite. Where a firm adopts climate goals or targets, it should be able to evidence how its plans to meet such goals or targets are integrated into its strategy.

2. Risk management

The PRA expects firms to have robust risk management frameworks for both operational and financial risks, which include climate-related risks.

• Risk identification and assessment: firms should carry out regular assessments to identify material climate-related risks and understand how they impact business model resilience over different time horizons and climate scenarios.  Firms should consider whether their materiality assessment is appropriate for the calculation of regulatory capital and liquidity requirements and expand their list of material risks as required.
• Identification and risk assessment of clients, counterparties, investees and policyholders: to inform their risk identification and assessment, the PRA expects firms to understand risks that arise from relationships with third parties. Firms should identify relationships that have a material impact on their climate-related risk profile, including, for example, credit risk associated with lending or market risk associated with the holding of securities, as well as reputational and litigation risks. Exposures to specific geographic regions and sectors may impact this assessment. The role of the assessments should be clearly defined, e.g. risk scoring could be used to limit exposures to certain entities or to exit relationships.
• Risk measurement and monitoring: firms should consider all material risks and their categorisation in their risk register, with appropriate metrics and limits being used to assist in the monitoring of these risks.
• Internal risk reporting: if internal risk reporting is not already in place, firms should implement an appropriate reporting framework for climate-related risks. The frequency of reporting, and engagement with the board and sub-committees, should be proportionate to the materiality of the risk.
• Operational resilience: firms should be cognisant of the impacts changes in climate conditions might have on operational resilience. Risks should be assessed in terms of impact on general operations and the ability to continue providing important services, including where these are supported though outsourcing. Material climate-related risk drivers should be incorporated within the firm’s business continuity and contingency framework.

3. Climate scenario analysis

Climate scenario analysis (CSA) is a key tool to enable firms to identify, quantify and manage climate-related risks. The PRA expects firms’ use of CSA to enable them to assess the impact of climate change and climate-related risks on the firm’s business model through conceptually sound models and toolkits supported by relevant research, although firms should be aware of the limitations of the tools used. The expectation for firms to use more sophisticated CSA tools increases in line with any increases in the magnitude and likelihood of the material risks they are exposed to. The PRA provides examples of use cases and considerations for time horizons, frequency and calibration.

4. Data 

A clear approach to data means firms can make better climate-risk management decisions. The PRA expects firms to identify and assess any data gaps that may impact their assessment on an ongoing basis to achieve a better understanding of any uncertainty, which can then be reflected in their analysis of risk appetite and development of data and risk management tools. Where reliable or comparable data is unavailable, firms should employ alternative solutions, such as appropriate proxies, assumptions, or approximations.

5. Disclosures

When discharging existing general disclosure requirements for material and principal risks, firms are expected to include any disclosures required to provide transparency on their approach to managing climate-related risks. These should indicate how risks are integrated into the firm’s governance and risk management processes, including details of the firm’s assessment process for material or principal risks. 

Many firms within the scope of SS5/25 will be subject to existing climate disclosure regimes applicable to listed companies under the FCA’s rules and to the largest companies under the Companies Act 2006, which are currently based on the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Firms are encouraged to engage in broader initiatives on climate-related risk disclosures, including the UK Sustainability Reporting Standards (UK SRS, which we reported on here), and consider the benefit of disclosures that are comparable across firms. When adopted, UK SRS will incorporate the International Sustainability Standards Board (ISSB)’s International Financial Reporting Standards (which incorporate and build on TCFD) and in due course replace the TCFD recommendations in the UK disclosure regimes. We note that firms may also be subject to disclosure regimes in other jurisdictions (including the EU). This means firms should be approaching their strategy toward these expectations in a way that aims to take account of any such other overlapping schemes.

 6. Banking and insurance-specific issues

The PRA has set out specific expectations for the banking and insurance sectors. These include expectations regarding: 

1. For banking: accounting considerations, the internal capital adequacy assessment process (ICAAP), the internal liquidity adequacy assessment process (ILAAP) and the transmission channels through which climate-related risks affect a bank’s risk categories.
2. For insurance: own risk and solvency assessments (ORSA), solvency capital requirements (SCR) and specific expectations relating to risk management and risk appetite.

Next steps for firms

Firms should consider the content of SS5/25 in detail, as they have six months (i.e. until 3 June 2026) to conduct internal reviews to identify the expectations that will require action. The PRA is clearly expecting firms to make tangible improvements to their risk management practices, and firms should be able demonstrate a credible and ambitious timetable to address any gaps. Firms should also consider how to tailor their strategy towards compliance in a way that takes account of the various requirements they may be subject to in other jurisdictions.

As climate-related risks seem to only be increasing, embedding robust controls and internal systems in line with the PRA’s expectations will help ensure that risks are appropriately considered and addressed. However, the PRA recognises that implementation will require ongoing collaboration across industry to develop and advance best practices. It will continue to engage with industry in developing further guidance, including by inviting the Climate Financial Risk Forum to update its guidance and tools to support firms in meeting the new expectations. Firms are also encouraged to engage with their supervisors where appropriate to ensure their approaches remain effective as the climate risk landscape continues to evolve.