Bank of England Finalizes Updated Climate Risk Expectations For Banks & Insurers

Key Takeaways

• Updated Supervisory Expectations: The PRA has finalized SS4/25, replacing its 2019 climate risk framework and requiring banks and insurers to further embed climate-related financial risks into governance, strategy, and risk management.
• Proportionate And Practical Approach: Firms must scale their climate risk capabilities according to the materiality of their exposure — not size alone — and clearly justify materiality judgments.
• Six-Month Review Period: Firms have six months to assess their current position against the updated expectations and develop credible plans, with no requirement to complete remediation within that window.
• Scenario And Data Flexibility: Scenario analysis remains central but can be more narrative-driven and supported by sensitivity analysis; firms must understand data limitations but are not required to quantify uncertainty.
• Litigation Risk Elevated: Climate-related litigation risk can now be treated as a distinct transmission channel, reflecting its rapid growth and relevance — particularly for insurers.

Deep Dive

The Bank of England’s Prudential Regulation Authority has issued a refreshed set of expectations for how banks and insurers manage climate-related risks, a big shift from early awareness-building to full integration in risk processes.

The Policy Statement replaces the PRA’s original 2019 guidance and brings Supervisory Statement 4/25 into effect immediately. The regulator describes this as an evolution, not an overhaul—strengthening clarity and practicality while keeping a principles-based, proportionate approach.

One of the clearest developments is the emphasis on tailoring. The PRA states that firms should scale their climate-risk work according to the materiality of their exposure, not simply their size. A small regional bank concentrated in flood-prone areas may face greater risk than a diversified global institution.

Industry feedback pushed for more explanation of what proportionate application looks like. The final statement addresses that — confirming firms must be able to show their reasoning when judging climate risks as material or immaterial and update those judgments as the science and data evolve.

Crucially, governance doesn’t need new bureaucracy. Boards can oversee climate risk through established structures, and no new dedicated climate Senior Management Function is expected, just clearly assigned responsibility.

The Six-Month Window: Planning, Not Panic

One of the more practical clarifications: firms now have six months to review their current position against the updated expectations and set credible plans for closing any gaps.

That six-month period is not a deadline to finish remediation.
Supervisors won’t request evidence of plans until after that window, and changes to capital or liquidity models can remain aligned with standard regulatory cycles.

Climate Scenario Analysis remains a cornerstone but with less rigidity than in the consultation draft. The PRA now explicitly acknowledges:

• Narrative-based scenarios may be more useful at longer horizons
• Sensitivity analysis can be used where reverse stress testing wouldn’t add value
• Sophistication doesn’t automatically make a model better

The regulator also softens its stance on data. Instead of demanding quantified uncertainty, the final policy expects firms to understand limitations in the data they use, especially from third-party climate data providers, and apply proxies where necessary without assuming they must always be highly conservative.

Litigation Risk Moves Up The Agenda

With climate-related legal actions accelerating, from greenwashing claims to disputes over underwriting and investments, the PRA now allows firms to treat litigation as a distinct transmission channel when that better reflects their business model and risk profile. That is a change driven directly by consultation feedback, particularly from insurers.

For banks, climate-related risks should be embedded into ICAAP and ILAAP where material. Long-term scenario horizons can inform strategy, while the core capital framework stays focused on actionable timeframes.

For insurers, the ORSA remains the primary lens for assessing climate exposure beyond the one-year Solvency Capital Requirement horizon. The PRA reinforces that there is no standalone “climate capital charge”, climate is a driver of existing SCR components.

Concerns were raised about widening protection gaps for natural catastrophe coverage, especially with market changes looming later this decade, but for now the PRA points to continued coordination across government and industry rather than regulatory adjustment.

A Living Framework

The PRA is clear that SS4/25 is not the “end state". As data, models, disclosure regimes and global standards shift, firms, and supervisors, are expected to keep evolving. The regulator intends to continue working with the Climate Financial Risk Forum and broader industry groups to build out practical examples and case studies over time.

For now, the direction of travel remains consistent. Climate-related financial risks must be managed with the same seriousness and structure as other risks, and increasingly, with evidence that those judgments hold up under scrutiny.

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