Climate risk management – updated expectations from the PRA

In December 2025, the PRA issued Policy Statement 25/25 (PS25/25) and the final Supervisory Statement 5/25 (SS5/25), which replaced Supervisory Statement 3/19 with immediate effect. Setting clearer expectations for banks, insurers, building societies and PRA-designated investment firms, the updates build on previous guidance and signal a more mature approach to managing climate-related financial risks.

Clearer governance standards for climate risk

SS5/25 reiterates that climate risk is a financial risk and should sit within existing governance and risk management frameworks, not as a separate or specialist topic. While the overall direction remains unchanged, the statement introduces clearer expectations on board accountability, proportionality, scenario analysis and data governance.

PS25/25 summarises feedback to the earlier consultation (CP10/25) and explains how the PRA has refined its approach to support more consistent implementation across firms. 

For boards, this means greater accountability and informed challenge. For risk and finance teams, it requires closer integration of climate analysis into existing frameworks. Firms must show how climate considerations influence day-to-day decisions (rather than informing forward-looking exercises), with greater pressure to demonstrate proportionate and well-governed control activities.

The PRA consults on climate risk management

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Embedding climate risk into core governance

Climate change remains a significant financial risk to the UK system, driven by physical impacts like flooding and heat stress, and transition risks from policy, technology and market shifts toward lower-carbon activity.

Many financial services firms have made progress, but reviews still show uneven maturity in governance, risk management and strategic decision-making.

Regulatory expectations are now clearer and more demanding. Firms must show climate risks are identified and embedded across governance, risk processes and strategy, supported by clear documentation and decision-useful management information.

Governance expectations

A central theme of SS5/25 is embedding climate-related risks within existing governance and risk frameworks instead of treating them as separate. Climate risk should inform business-as-usual decisions like other financial risks.

Boards and senior management are expected to play a more active role and not simply delegate entirely to specialist teams. In practice, boards should:

• approve the firm’s assessment of material climate-related financial risks
• ensure climate considerations are embedded within strategy and business planning
• receive management information that enables effective oversight and challenge.

The PRA confirms firms do not need new senior management functions if responsibilities are clearly assigned within existing governance.

Risk management expectations

Risk management expectations have also been clarified. Firms must integrate climate risks across all relevant risk types using transparent methodologies and documented assumptions. This includes capturing sectoral, geographic and counterparty exposures and ensuring risk registers incorporate climate risk directly or via specific components.

The PRA recognises that some aspects, like litigation risk, continue to evolve. Firms may apply judgement in categorisation if rationale is clear and documented.

Materiality and proportionality

Materiality and proportionality are reinforced as core principles throughout SS5/25. The PRA emphasises that the depth and sophistication of a firm’s approach should reflect the materiality of climate risk to its business, rather than firm size alone.

Firms are expected to identify and assess climate-related risks, obtain board sign-off on those assessments, and apply risk management responses that are proportionate to the risks identified. The supervisory statement also highlights the role of the Climate Financial Risk Forum (CFRF) in providing practical guidance to support implementation.

Climate scenario analysis

Climate scenario analysis carries greater weight under the updated expectations. The PRA expects scenario analysis to be governed, validated and documented with the same discipline applied to other strategic risk tools. Outputs should inform strategic planning, risk management, capital planning and, where relevant, fair-value assessments.

Recognising the challenges associated with long-term modelling, the PRA confirms that narrative-based scenarios and expert judgement remain acceptable where precise quantification is not feasible – provided approaches are well governed and clearly explained.

Data expectations

Data expectations have been refined to take a more pragmatic approach than that proposed in the consultation. Firms are no longer expected to quantify data uncertainty or default to conservative proxies. Instead, they must demonstrate a clear understanding of data limitations, select proxies that are appropriate and well understood, and maintain robust governance over any third-party data or models used.

Sector-specific clarifications

SS5/25 also includes sector-specific clarifications. For banks, climate risks should be integrated into processes such as the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP), while allowing longer-term analysis to inform strategic planning. For insurers, the PRA clarifies how climate risks can be reflected within solvency capital calculations and internal models; and highlights the need for life and health insurers to consider long-term trends in mortality, morbidity and public health.

Looking ahead 

The PRA’s updated supervisory expectations under SS5/25 mark a significant step forward in managing climate-related financial risks. By clarifying governance, scenario analysis and data requirements, the policy gives firms a clear framework for embedding climate considerations into everyday decision-making.

With the policy now in force, firms should assess their current alignment, identify gaps and agree a board-approved remediation plan by June 2026. Strengthening management information and documentation will be essential to support proportionality decisions, while scenario analysis must move beyond compliance exercises to genuinely inform strategy and risk management.

Early action will not only reduce implementation risk but also demonstrate a well-governed approach and build resilience against longer-term climate challenges.

For more information, contact Kantilal Pithia, Rashim Arora or Irina Velkova.