On 3 December 2025, the Prudential Regulation Authority (PRA) published Policy Statement 25/25: Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19 (PS25/25).

Background

In PS25/25 the PRA provides feedback to the responses it received to Consultation Paper 10/25:  Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19 (CP10/25). It also contains the PRA’s final policy contained in Supervisory Statement 4/25 – Enhancing banks’ and insurers’ approaches to managing climate-related risks (SS4/25).

In CP10/25, the PRA proposed to:

  • Strengthen governance arrangements by ensuring that firms’ boards and senior management are actively engaged in overseeing climate-related risks. This includes embedding climate considerations into strategic decision-making and ensuring accountability for climate oversight.
  • Enhance risk management frameworks to ensure that climate-related risks are integrated across all relevant risk types. Firms are expected to adopt robust, transparent methodologies and assumptions, with appropriate oversight, to assess and manage these risks proportionately to their business models and exposures.
  • Advance the use of climate scenario analysis by requiring firms to demonstrate a strong understanding of how scenario outputs inform business decisions. The PRA emphasised the need for firms to move beyond compliance and use climate scenario analysis as a strategic tool to assess resilience under different climate pathways.
  • Improve the quality and usage of climate-related data, recognising that effective risk management depends on reliable, granular and forward-looking data. Specifically, that firms should critically assess data sources and address gaps in coverage and quality to support decision-making.
  • Maintain expectations around disclosures, encouraging firms to provide transparent, decision-useful information to stakeholders. This includes aligning disclosures with evolving international standards and ensuring consistency in reporting climate-related risks and opportunities.
  • Outline banking-specific expectations, including the integration of climate-related risks into the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). The PRA also proposed that banks should have appropriate processes in place to ensure timely capture of climate-related risks for financial reporting purposes, subject to effective governance.
  • Set out insurance-specific expectations, including incorporating climate-related risks into the Own Risk and Solvency Assessment and stress testing frameworks. The PRA also addressed the need for insurers to consider long-term trends in mortality, morbidity and public health, particularly for life and health insurers.
  • Replace SS3/19 in its entirety at the time of publication of the new Supervisory Statement (SS4/25). Following publication of the final policy, firms would be expected to conduct an internal review of their current status in meeting the expectations set out in the final policy, and to develop plans for addressing these gaps. To allow firms time to transition to the updated expectations, the PRA proposed that supervisors would not ask firms to evidence their internal assessments or action plans until at least six months after the publication date.
  • Provide guidance on the proportionate application of the expectations by firms.

Final policy

The PRA states that overall the responses to CP10/25 were supportive but it has made some changes to the final policy in several areas, including the proportionate application of the expectations and the role and application of scenario analysis and reverse stress testing.

The main changes to SS4/25 are:

  • Clarification of proportionate application of expectations by firms: The PRA has introduced an additional ‘Overarching aims’ section to the ‘Proportionate application of expectations’ sub-section of Chapter 3: Implementation. This explains the policy intent behind the expectations, particularly regarding how firms should determine how a proportionate application of the final policy reflects their level of exposure to material climate-related risks, as well as the size and complexity of their business. It also notes the important role of the Climate Financial Risk Forum (CFRF) in supporting implementation of the expectations through guidance and case studies.
  • Recognition of litigation risk: The PRA has decided that given the evolving nature of climate-related litigation risk, firms can apply judgement to categorise it in the way that best reflects their business and risk profile, and that in some cases this may include defining litigation risk as a distinct transmission channel.
  • Clarification of review period: With respect to the six-month review period proposed in CP10/25, the PRA has clarified that this is not an implementation timeline, but a period during which firms would be expected to conduct an internal review of their current status in meeting the expectations set out in the final policy. As part of this internal review, firms should identify the expectations that require further work for them to meet and develop a credible and ambitious plan for how they will address any gaps. Supervisors would not ask for evidence of firms’ internal reviews and action plans until at least after the end of the six-month review period.
  • Cost-benefit analysis (CBA): The PRA has clarified the core assumptions underpinning its CBA. Specifically, the cost estimates reflect the incremental costs associated with implementing the updated expectations, rather than costs of meeting the expectations that were already in place.
  • Governance: In light of responses from firms, the PRA has confirmed that firms may integrate climate-related responsibilities within existing governance frameworks rather than establishing new ones if risk identification remains robust.
  • Risk management: The PRA has clarified that firms may integrate climate-related risks into existing risk registers or use supplementary sub-registers if that approach supports robust risk identification. The PRA also confirms that the ‘accept, manage, avoid’ language in the final policy is a suggestion, rather than an expected format. Other minor edits have been made in relation to the proposed Operational Resilience expectations, to align them with SS1/21 – Operational resilience: Impact tolerances for important business services.
  • Climate scenario analysis (CSA): In line with the flexibility for firms to select scenarios that best suit their risk profiles and the application of proportionality, the PRA has clarified that the number and type of CSA exercises should be commensurate with the firm’s climate risk exposure. The PRA has also made a small change that firms can choose whether to use reverse stress and/or scenario-based sensitivity analysis and that analysis over longer-time horizons can rely more on narrative scenarios and less on precise quantification.
  • Data: The PRA has made two changes to the final policy following responses from firms. The first reduces the expectation for firms to ‘quantify’ data uncertainty to an expectation for firms to understand it. The second is that firms do not need to use conservative proxies where data or models are inadequate; instead, they should select appropriate proxies and remain aware of their limitations.
  • Banking-specific expectations: The PRA has confirmed that firms may align climate scenario horizons used in ICAAPs and ILAAPs with standard timeframes for those processes, while also considering longer-term scenarios for strategic planning. On financial reporting, the PRA has acknowledged challenges around data availability and maturity of firms’ climate risk capabilities. However, it has reaffirmed that its expectations remain consistent with accounting standards and audit requirements.
  • Insurance-specific expectations: The PRA has clarified that the existing Solvency Capital Requirement (SCR) Rules provide sufficient flexibility for an insurer to take account of climate-related risks in a way that it considers appropriate. For internal models, the PRA considers climate-related risks to be a risk driver in various components of the SCR. On credit ratings for the regulatory balance sheet, the PRA has clarified that where a firm considers that a CRA does not make sufficient allowance for risks when issuing a credit rating, including climate-related risks, it may make an appropriate adjustment. For market prices of climate-related risks, the PRA has clarified that if a firm considers these risks to be underpriced, it may reflect this in its ORSA and SCR.

Next steps

The final policy takes effect on 3 December 2025.