Enhancing Prudential Regulation and Financial Stability: ESG BROADCAST shares key takeaways.
The Bank of England’s Prudential Regulation Authority (PRA) has issued Policy Statement PS25/25, finalizing updated supervisory expectations for UK banks and insurers regarding the management of Climate-Related Risks. This policy statement officially replaces the previous Supervisory Statement SS3/19 and takes effect immediately upon publication on December 3, 2025. The update is a significant step in the PRA’s mission to mature the financial sector’s ability to assess and build resilience against the increasing frequency and severity of physical and transitional climate events, thereby safeguarding financial stability.
The final policy, detailed in Supervisory Statement SS4/25, aims to provide greater clarity and detail on the PRA’s expectations, aligning the UK framework with evolving international standards. The PRA emphasizes a proportionate and principle-based approach. While all UK insurance and reinsurance firms, banks, building societies, and PRA-designated investment firms are in scope, the application of the expectations must be tailored to the materiality of a firm’s Climate-Related Risks exposure, recognizing that exposure is driven more by business model and geographical factors than by firm size alone.
A core component of the strengthened framework is the enhanced focus on governance and accountability. Firms are required to ensure that boards and senior management are actively involved in overseeing Climate-Related Risks, embedding these considerations into strategic decision-making. The PRA clarified that this does not necessitate the creation of a new Senior Management Function (SMF) role specifically for climate risk, but rather requires clear identification of the existing SMF holder(s) or senior individual(s) responsible for this oversight.
The Statement also mandates stronger integration of Climate-Related Risks across existing risk management frameworks. Firms must incorporate all material climate-related risks into their risk registers—either directly or via supplementary sub-registers—and define climate-specific risk appetites. Furthermore, the PRA pushes for more advanced use of climate scenario analysis (CSA), demanding that firms move beyond compliance to use CSA outputs as a strategic tool to inform crucial business decisions and assess resilience under various climate pathways.
In response to industry feedback, the PRA introduced several clarifications to ensure practicality. Regarding data, the expectation to ‘quantify’ data uncertainty has been moderated to an expectation for firms to ‘understand’ it, acknowledging the ongoing challenges in data availability and model maturity. For banks, the policy confirms that while long-term scenarios must be considered for strategic planning, the climate scenario horizons used in the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP) may align with standard timeframes for those processes.
Strategic significance lies in the policy’s reinforcement of the ‘inside-out’ view of climate risk, cementing it as a core Prudential Regulation requirement rather than a purely reputational or reporting exercise. For financial institutions, compliance requires an immediate internal review to identify gaps against SS4/25, followed by the development of action plans, which supervisors will begin assessing within at least six months of the publication date. This shift elevates the management of Climate-Related Risks from a disclosure exercise to an integral part of capital adequacy, stress testing, and long-term business strategy, influencing lending, underwriting, and investment decisions across the market.
