PRA updates policy on managing climate-related risks

The PRA has published its final policy on enhancing banks’ and insurers’ approaches to managing climate risks.

The consultation had planned – among other things – to strengthen governance arrangements; enhance risk management frameworks; advance the use of climate scenario analysis; improve the quality of climate-related data; maintain expectations around disclosures; outline banking- and insurance-specific expectations; and provide guidance on proportionate application. Respondents generally welcomed all of the PRA’s proposals – a key theme that emerged was a request for a clearer distinction between PRA expectations and illustrative guidance. Firms also sought clarity on implementation timelines.

Key changes in the policy statement include:

• Clarification of proportionate application of expectations – the PRA has added an ‘Overarching aims’ section to its supervisory statement, explaining how firms should determine a proportionate application of policy based on their exposure to material climate-related risks, as well as the size and complexity of their business;
• Recognition of litigation risk – the PRA acknowledges the evolving nature of climate-related litigation risk and allows firms to apply their own judgment in categorising according to their risk profile, which in some cases may involve defining litigation risk as a distinct transmission channel;
• Clarification of review period – the PRA confirms that 6 month review period proposed is not an implementation timeline, rather a period during which firms should conduct an internal review of the current status in meeting the policy’s expectations;
• Governance frameworks and risk management – firms may integrate climate-related responsibilities and risks within existing governance frameworks and risk registers, provided that risk identification remains robust;
• Climate scenario analysis – the number and type of climate scenario analysis exercises should be proportionate to the firm’s climate risk exposure;
• Data – the PRA has reduced the expectation for firms to ‘quantify’ data uncertainty to an expectation for firms to understand it. Firms are also not required to use conservative proxies where data or models are inadequate and should instead select appropriate proxies and remain aware of their limitations;
• Banking-specific expectations – firms may align climate scenario horizons used in their Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP) with standard timeframes for those processes, while also considering longer-term scenarios for strategic planning; and
• Insurance-specific expectations – the PRA has clarified that the existing Solvency Capital Requirement rules provide sufficient flexibility for an insurer to take account of climate-related risks in a way that it considers appropriate.

The final policy takes effect on 3 December 2025.