The Bank of England’s Prudential Regulation Authority (PRA) has launched a consultation on proposed updates to its supervisory expectations for how banks and insurers manage climate-related financial risks, marking a significant step in bolstering the financial sector’s resilience to climate change.
The proposals, outlined in a speech by David Bailey, Executive Director for Financial Market Infrastructure, seek to update Supervisory Statement 3/19, originally issued in 2019, to reflect developments in climate risk understanding and regulatory best practice over the past five years.
Bailey warned that climate-related risks—both physical and transition—have intensified significantly over the past decade, citing recent extreme weather events such as floods in Spain and Pakistan and devastating wildfires in California. He emphasised that financial firms are increasingly exposed to the economic consequences of such disasters, as well as the policy and market shifts associated with the transition to a low-carbon economy.
The updated expectations are not new rules but enhanced guidance designed to help firms more effectively assess and manage climate risks. Central to the changes is a stronger emphasis on scenario analysis—a key tool for understanding the financial impacts of climate change in the absence of reliable historical data. Firms will be expected to use these scenarios not only for risk modelling but to inform strategic decision-making at all levels, from governance to business lines.
Bailey highlighted the need for firms to define a clear climate risk appetite and embed it throughout their operations. Senior management will be expected to demonstrate robust oversight and ensure that assumptions and data underpinning climate risk frameworks are both transparent and credible.
The consultation also reinforces the importance of high-quality climate-related disclosures, aligning with international efforts such as the work of the International Sustainability Standards Board (ISSB) and the development of UK Sustainability Reporting Standards (SRS).
The PRA stressed that its approach remains risk-based and proportionate. Firms facing limited exposure to climate-related risks may scale their responses accordingly, while those with greater exposure will be expected to adopt more sophisticated tools. The aim is to improve resilience without stifling competition or imposing undue regulatory burden.
While acknowledging the short-term costs of implementation, the PRA argues that the long-term benefits—through better risk identification and a more stable financial system—will far outweigh these, particularly as the economy advances towards net zero.
The updated guidance has been shaped by industry feedback and experience gained through initiatives such as the Climate Financial Risk Forum (CFRF), a joint PRA–FCA industry group established to build capacity and share best practice. Bailey credited the CFRF with helping firms adapt to the evolving risk landscape and signalled its continued importance in supporting implementation.
Stakeholders have until 20 July 2025 to respond to the consultation. A final statement is expected later in the year.
