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Bank of England Proposes Updated Climate Risk Expectations for UK Banks, Insurers

Bank of England Proposes Updated Climate Risk Expectations for UK Banks, Insurers

Bank of England Proposes Updated Climate Risk Expectations for UK Banks, Insurers

  • The BoE’s Prudential Regulation Authority (PRA) launches consultation to enhance climate risk management frameworks in the financial sector.
  • Proposals place stronger emphasis on scenario analysis, risk appetite alignment, and data governance.
  • Review finds banks’ and insurers’ climate risk capabilities remain “in their infancy,” prompting a supervisory overhaul.

The Bank of England has issued new proposals to reinforce its climate-related supervisory expectations for banks and insurers, citing patchy progress and immature risk frameworks since its 2019 guidance. The updates are laid out in a Consultation Paper open through 30 July 2025, and would revise Supervisory Statement 3/19.

Effective risk management at firms will help create a more resilient financial system that can withstand the increase in the frequency and severity of climate events that we are experiencing and any changes in the transition pathway,” said David Bailey, Executive Director of Prudential Policy at the BoE.

The Prudential Regulation Authority (PRA) found that while firms have made some strides, most remain early in their journey. Many lack climate-specific risk appetites and have not sufficiently embedded climate risks into business decision-making.

Firms have made progress, [but] their capabilities to identify and manage climate-related risk are still at an early stage,” the PRA stated, adding that banks’ frameworks “are still in their infancy.

For banks, the PRA notes that most have not yet developed clear metrics or climate risk appetite statements. Many still do not consider climate change a material risk — a view not grounded in robust risk assessments.

Many firms do not currently consider climate-related risk to be a material risk, yet this conclusion is not based on an adequate assessment of climate-related risk exposures,” the PRA said.

In the insurance sector, while more firms have included climate risks within risk appetite statements, actual metrics are often too broad or disconnected from financial outcomes.

RELATED ARTICLE: Bank of England Releases Report on Climate-Related Risks and the Regulatory Capital Frameworks

Current metrics often do not directly quantify climate-related financial risks and, therefore, do not allow insurers to measure and monitor their climate exposures against risk appetite,” the PRA noted.

Key updates in the proposal include:

  • Enhanced scenario analysis: Firms must demonstrate understanding of scenario outputs and apply insights to real-world decisions.
  • Clear climate risk appetites: Boards must regularly review and align appetite statements with climate risk exposures and strategic direction.
  • Data governance: Firms must identify data gaps, implement remediation plans, and ensure robust controls over external data sources.

The PRA emphasized that these are expectations, not rules, and that requirements will remain proportional to firms’ exposure levels. Firms with less material exposure may scale their response but must ensure prudence in assumptions and judgments.

The proposed framework reflects global best practice, drawing from the Basel Committee on Banking Supervision and Network for Greening the Financial System. The PRA also reiterated its support for the International Sustainability Standards Board (ISSB) in strengthening disclosure quality.

The Bank of England concludes that stronger integration of climate risk into governance, strategy, and controls will help firms weather long-term shifts and safeguard market stability.

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