The Prudential Regulation Authority has issued sweeping new expectations on how UK banks and insurers must manage climate-related financial risks, in a move designed to harden the sector’s resilience as extreme weather and transition pressures intensify.

Published as Policy Statement 5/25, the rules replace the PRA’s original 2019 guidance and set out updated supervisory expectations in a new statement on climate risk.

The regulator said the package is intended to move firms beyond early-stage efforts and embed climate considerations into core risk management, capital planning and strategic decisions.

The policy applies to all PRA-supervised banks, building societies, designated investment firms and insurers in the Solvency II and non-Solvency II regimes, but excludes branches of overseas entities.

The PRA stressed that proportionality is central, with expectations scaled to the materiality of each firm’s climate exposure rather than its size alone.

The new statement clarifies how climate risk should be governed at board and senior management level.

Firms are expected to integrate responsibilities into existing structures rather than create new layers, but must ensure that decision makers understand climate risks and that material exposures are reflected in risk appetite frameworks.

The PRA confirmed there is no requirement for a dedicated senior management function for climate.

On risk management, the PRA insists that all material climate risks appear in firms’ risk registers, though it accepts they can sit within existing registers or sub-registers.

Firms are expected to identify how climate acts as a driver of credit, market, operational and insurance risks, and to apply judgement on the granularity of risk appetite and limits.

Climate scenario analysis remains a cornerstone of the framework, but the PRA has softened aspects of its original proposals.

Firms can use narrative as well as mathematically sophisticated scenarios, tailor the number and type of exercises to their risk profile, and choose between reverse stress testing and scenario-based sensitivity analysis where appropriate.

Longer-term horizons may rely more on story-led analysis than precise quantification.

Recognising widespread data gaps, the PRA has lowered the bar from quantifying uncertainty to understanding it, and no longer expects firms always to use conservative proxies.

Instead, they should select appropriate proxies, understand their limitations and interpret outputs prudently. Firms may use both internal and third-party data but remain responsible for assessing quality and governance.

The policy also acknowledges the growing importance of climate litigation. Rather than prescribe a single model, the PRA allows firms to treat litigation risk either as part of physical and transition risk channels or as a distinct transmission channel, provided this reflects their business profile and is applied consistently.

For banks, the PRA confirms that climate risks must be considered within Internal Capital and Internal Liquidity Adequacy Assessment Processes, aligned to existing time horizons but with scope for longer-term scenarios in strategic planning.

For insurers, expectations cover the Own Risk and Solvency Assessment, the Solvency Capital Requirement and the regulatory balance sheet, with guidance on when internal models, capital add-ons or adjustments to ratings and spreads may be appropriate.

Industry responses to the consultation were broadly supportive, though firms sought clearer distinctions between binding expectations and illustrative guidance, and raised concerns over costs and implementation timelines.

The PRA has retained a six-month review period after the 3 December 2025 start date, during which firms must assess their compliance and develop plans, but are not required to close all gaps.

The regulator argues that by sharpening expectations while emphasising proportionality, the new framework will improve risk management without imposing unnecessary burdens and will help safeguard financial stability as climate risks evolve.