Bank of England Re-Evaluates Climate Risk Expectations for Banks & Insurers

Key Takeaways

• Climate Risks Are Growing: The PRA’s proposals respond to the escalating physical and transition risks posed by climate change, urging banks and insurers to prepare for more frequent and severe disruptions.
• Proportional Action: The proposals suggest a tailored approach, where firms must assess their unique exposure to climate risks and act accordingly.
• Focus on Resilience: The PRA’s updated guidance emphasizes the importance of resilience, encouraging firms to integrate climate risks into their decision-making processes to reduce future losses.
• Consultation Period: Firms are invited to submit feedback by July 30, 2025, helping to shape the final expectations and best practices for managing climate-related risks in the financial sector.

Deep Dive

The Bank of England has recently launched a consultation to update its approach to how banks and insurers should be managing the risks posed by climate change. The Prudential Regulation Authority (PRA), which oversees financial stability, is refining its expectations on how the sector can stay resilient as climate-related risks intensify. While this isn’t the first time the PRA has addressed the issue, having first issued guidelines back in 2019, the new proposals come as a response to the changing landscape of climate risk, which is evolving faster than many expected.

We’re all familiar with the increasing impact of climate change—rising sea levels, more frequent and severe floods, wildfires, and extreme temperatures. These aren’t just distant threats—they’re real, and they’re already affecting businesses, including banks and insurers. In the next decade or two, the financial sector could see far more disruption from climate change, with the impacts growing over time, both in frequency and scale.

And the risks aren’t only physical. The ongoing transition to a low-carbon economy presents its own set of challenges. As industries shift towards greener practices, there are opportunities, but also threats. For banks, this could mean the value of certain assets, like fossil fuel companies, taking a hit. For insurers, the value of portfolios may shift as carbon-heavy industries face rising costs or regulatory pressures. It’s clear: these risks are systemic, non-linear, and require serious planning.

The PRA has been keeping a close eye on how firms have been managing climate-related risks since 2019. While there has been progress, it’s clear that many firms are still struggling to fully integrate climate risks into their operations. This consultation is the Bank of England’s response to these challenges, offering more clarity on what it expects moving forward.

These proposals offer a clearer framework for banks and insurers to identify, assess, and manage climate-related risks in a way that fits their unique exposures. The aim is to help firms build resilience, while also providing enough flexibility for innovation. If you’re wondering whether the PRA is asking for radical shifts in approach, the answer is no. But it is asking for action and accountability, with a focus on making sure firms are prepared for what lies ahead.

The Two Types of Climate Risks: Physical and Transition

The proposals break climate risks down into two categories:

• Physical Risks: These are the more obvious risks—extreme weather events like floods, wildfires, and heatwaves, and longer-term shifts like rising sea levels and temperature changes. These can disrupt operations directly (think: a flooded office building) or indirectly (think: the broader economic impacts that affect loan repayments or insurance claims).
• Transition Risks: As the world moves toward a lower-carbon economy, certain assets will lose value, and industries will face new regulations and costs. Banks and insurers could see financial losses if they’re tied up in carbon-heavy industries or assets that become obsolete as the world shifts to greener alternatives.

For banks and insurers, understanding and managing these risks isn’t just about avoiding financial losses; it’s about long-term sustainability. Firms that are proactive about addressing these risks will be better positioned to thrive as the world changes. On the other hand, those who ignore these risks may find themselves at a disadvantage as climate disruptions escalate.

The PRA’s updated expectations aim to support firms in embedding climate risk into their decision-making processes. This isn’t just about compliance—it’s about being smart and resilient in an uncertain world.

Given the complexity of these risks and the need for innovation, the PRA is encouraging collaboration across the industry. The proposed guidance emphasizes that firms will need to actively engage with each other, share insights, and build best practices for climate risk management. The goal is to create a financial sector that’s not just reactive, but prepared and resilient to the impacts of climate change.

How Banks and Insurers Can Respond

The PRA is asking for feedback on these proposals, giving firms the opportunity to shape the final guidance. Responses are due by Wednesday, July 30, 2025, and firms are encouraged to share their views on how these proposals could be refined or made more effective.

In the end, the PRA’s proposals are about future-proofing the UK’s financial sector and ensuring it can weather the storms (both literal and figurative) that are coming our way. The more resilient our financial system becomes to climate risks, the better positioned we’ll be to address the broader challenges posed by climate change. For firms, this is both a responsibility and an opportunity to lead in a rapidly changing world.

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