Climate Risk Has Become Prudential

The Bank of England’s new Supervisory Statement 4/25 – Enhancing banks’ and insurers’ approaches to managing climate-related risks marks a decisive moment in UK financial regulation. Climate risk has now shifted from a disclosure-led conversation to a prudential risk discipline — with expectations that take immediate effect.

SS4/25 replaces the 2019 climate-risk guidance and reflects six years of supervisory learning. While some firms have made meaningful progress, the Bank is clear: progress has been uneven, climate events are intensifying, and the market needs a more consistent, risk-based approach.

" Understanding and effective risk management of climate-related risks remains challenging and continues to evolve.” The PRA 

 Below is a breakdown of what has changed, why it matters, and what banks and insurers should prioritise next. 

Boards are now unequivocally accountable 

SS4/25 strengthens governance expectations substantially. Firms must demonstrate that boards and senior management:

• Actively oversee climate-related financial risks
• Understand climate transmission channels and business model impacts
• Integrate climate risk into strategy, risk appetite and decision-making

This elevates climate risk to the same governance tier as credit, liquidity, operational and market risk.

Climate risk must be embedded across the risk framework

The PRA now expects firms to adopt robust, transparent methodologies to assess and manage climate-related risks. This includes:

• Defensible assumptions and analytical frameworks
• Integration into credit underwriting, capital management and pricing
• Proportionate but rigorous approaches depending on materiality

This is about risk discipline, not sustainability reporting.

Scenario analysis is a supervisory expectation

SS4/25 requires firms to show how scenario analysis informs real business decisions — not theoretical narratives.

Firms must develop:

• Severe-but-plausible climate scenarios
• Transparent methodologies and internal challenge
• Credible long-term pathways (including narrative-based assessments where quantification is uncertain)

Scenario analysis is now treated as essential risk infrastructure.

Data quality is now a prudential concern

One of the clearest and most consequential parts of the Statement: data gaps, unreliable proxies and unverified sources create financial risk — and must be addressed.

Firms are expected to::

• Critically assess climate-related data sources
• Identify gaps, inconsistencies and limitations
• Strengthen data lineage, governance and validation

In practice, this shifts climate data from “reporting support” to core risk-management infrastructure.

Proportionality remains - but materiality rules all

The BoE acknowledges firms differ in size and complexity. But it also states clearly that the impact of climate risks depends on business model and exposures, not firm size.

Smaller firms may apply simpler approaches — only if they remain fit for purpose.

What firms should prioritise in the next six months

With SS4/25 effective immediately, firms must now conduct an internal review and develop a credible plan to address gaps. Supervisors expect to see progress within six months.

The highest-priority areas include:

Strengthening governance and board oversight - Boards must demonstrate informed, decision-relevant understanding of climate risk.

Upgrading climate-risk data foundations - Firms need traceable, high-quality, and transparent data — especially where disclosures are limited.

Enhancing scenario analysis - Methodology, transparency, and decision-usefulness will be scrutinised.

Data quality is now a prudential concern - High-quality, transparent data is essential for defensible climate-risk decisions and regulatory confidence.

Ensuring climate risk is embedded across ICAAP, ORSA, credit and underwriting - This is no longer optional.

Final thought: Climate risk has entered its prudential era

This Supervisory Statement brings clarity, consistency and — importantly — urgency.

Climate risk is now treated with the same seriousness as other risks that threaten safety and soundness.

The institutions that will move fastest, and gain the most, are those that:

• Treat climate risk as a core financial risk
• Build strong governance and analytical capability
• Invest in reliable, auditable environmental data; and
• Embed climate risk into risk appetite frameworks

As expectations rise, many institutions are re-evaluating their climate-data dependencies — especially where global providers are retreating. 

The market is shifting toward reliable, Europe-anchored data and analytics that support both climate-risk management and transition-opportunity assessment.

More reflections coming soon.

Thanks for reading.