The winds of change are blowing, and they are carrying more than just leaves. The climate agenda in financial services has just taken a decisive turn with the release of Consultation Paper CP10/25 on 30 April 2025. The Prudential Regulation Authority (PRA) is making a bold statement: climate risk is no longer a side issue – it’s central to the future of financial resilience.
This consultation is not merely a policy update. It is a call to action, with implications for data, analysis, governance, and capital adequacy that will shape business strategy in the coming years. The message is unequivocal: banks and insurers must accelerate efforts to embed climate risk into their governance, risk, and capital frameworks – or risk falling behind both regulator and market expectations.
Why Now? A Recap of Where We Have Been
Back in 2019, the PRA published the original version of Supervisory Statement SS3/19 – a foundational step at a time when most firms’ climate risk capabilities were, frankly, nascent at best.
Fast-forward to 2025, and the PRA has published CP10/25 that sets out the PRA’s proposals on updated supervisory expectations for banks and insurers, that reflects the urgency and complexity of today’s climate realities.
| Access the full PRA Consultation Paper: | CP10/25 – Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19 | Bank of England |
| Updated SS3/19 (Draft) | Draft supervisory statement – Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19 |
| Consultation Closes | Wednesday, 30 July 2025. Feedback is open |
What’s Driving the PRA’s Intervention?
Despite increased attention over recent years, the PRA has identified persistent shortfalls in how firms manage climate-related financial risks:
- Insufficient data granularity – particularly regarding the physical locations of mortgaged assets – limits firms’ ability to assess their exposure to climate events.
- Underdeveloped scenario analysis – with many firms applying overly simplistic or generic stress tests, failing to inform real-world business decisions.
- Siloed climate risk – often treated as a reputational or ESG concern rather than a core strategic and financial risk.
The PRA views these limitations as barriers to financial resilience in an era of escalating physical and transition risks. CP10/25 is designed to close these gaps.
Understanding the Twin Pillars of Climate Risk:
| Physical Risks | Transition Risks |
| Think extreme weather events – floods, storms, heatwaves. These aren’t just abstract concepts; they translate into tangible losses: damaged assets impacting loan collateral and disrupted supply chains affecting borrowers’ ability to repay. Ignoring these is like building a sandcastle at high tide. | This is where policy shifts, technological advancements, and changing consumer preferences come into play as the world moves towards a low-carbon economy. Imagine a bank heavily invested in fossil fuel industries facing sudden devaluation as greener alternatives surge. It’s about navigating the shift without getting left behind in the carbon dust. |
The Regulator’s Lens: What the PRA is Saying
The CP isn’t just a gentle suggestion; it’s a clear call to elevate the management of these risks. Key themes emerging include:
- Data and Exposure Visibility: The PRA expects firms to enhance their understanding of where and how they are exposed to climate risks – at both asset and portfolio levels. This includes improving data capture on asset locations, emissions profiles, and sector-level transition exposure.
- Comprehensive Climate Risk Modelling: The ability to not only collect relevant data but also to use sophisticated analysis to understand potential future impacts. This moves beyond simply looking at historical data, explicitly stating that standard stress testing and scenario analysis approaches calibrated on backward-looking data are not suitable predictors of climate-related risk. This means:
- Using bespoke and severe-but-plausible climate scenarios to account for the uncertainty about future climate-related outcomes.
- Modelling both short- and long-term impacts, considering non-linearities, potential tipping points, and irreversible damage.
- Integrating outputs into capital planning, lending strategies, and underwriting practices.
- Enhanced Governance: Embedding climate risk considerations at the highest levels of decision-making. This means boardrooms need to be as comfortable discussing climate scenarios as they are quarterly earnings.
- Robust Risk Management Frameworks: Integrating climate risk into existing risk management processes, from credit risk assessments to stress testing. It’s about ensuring climate risk isn’t treated as an afterthought but as a core component of sound banking practice.
- Clear Disclosure: Transparently communicating how climate-related risks are being managed to stakeholders. In today’s world, trust is built on transparency, and stakeholders want to know you’re not burying your head in the (sinking) sand.
- Capital Frameworks – Preparing for the Future: While the PRA is not proposing immediate changes to capital requirements, it highlights a concern: many firms cannot yet demonstrate whether they are appropriately capitalised against climate-related risks. The direction of travel is clear – better risk quantification today may shape capital expectations tomorrow.
Why Should Banks Care? The Bottom Line (and beyond)
This is not just a regulatory compliance issue – it’s a strategic inflection point for the industry. As climate risks increasingly impact asset values and credit performance, firms that fail to adapt risk being misaligned with future market realities.
For example:
- Lending to flood-prone areas may carry new provisioning and capital considerations.
- Carbon-intensive businesses may attract higher regulatory scrutiny.
- Access to green finance and investment may hinge on a firm’s ability to quantify and communicate its climate exposure.
Beyond regulatory compliance, proactively managing climate risk offers significant advantages for banks:
- Protecting Assets: Identifying and mitigating risks to loan portfolios and investments. A resilient bank is a bank that can weather any storm, literal or economic.
- Identifying New Opportunities: Financing the transition to a green economy opens up new markets and innovative financial products.
- Enhancing Reputation: Demonstrating a commitment to sustainability resonates with increasingly environmentally conscious customers and investors. In today’s market, being green can also mean being gold.
- Ensuring Long-Term Stability: By understanding and adapting to climate-related risks, banks can safeguard their long-term viability and contribute to a more resilient financial system.
The Road Ahead: Embracing the Challenge
The SS is expected to be finalised later this year. Following a six-month period, the PRA will commence assessing firm-level capabilities. To meet the PRA’s expectations and prepare for supervisory review, firms should focus on four key actions:
- Conduct a Climate Risk Maturity Assessment: Evaluate current capabilities across data, modelling, governance, and disclosures. Identify quick wins and structural gaps.
- Build Climate Data Infrastructure: Strengthen systems to capture granular asset-level data, sectoral emissions, and counterparties’ transition plans.
- Enhance Scenario Design and Modelling: Develop tailored climate scenarios and modelling approaches aligned to your business model. Ensure results inform risk appetite, product design, and capital planning.
- Embed Climate into Risk Governance: Align board and executive oversight with climate-related risk management. Define responsibilities, reporting lines, and performance metrics.
Delay could invite greater supervisory attention and reputational risk. The journey to effectively managing climate risk won’t be without its complexities. It requires a shift in mindset, investment in new capabilities, and ongoing collaboration. But the cost of inaction far outweighs the effort required.
Climate risk is not just a regulatory hurdle; it’s an opportunity to build a more resilient, sustainable, and ultimately, more successful future. Financial institutions must move beyond surface-level compliance to embed climate considerations into every facet of governance and risk management.
It’s time to navigate the green maze with clarity, purpose, and a healthy dose of proactive strategy.
How Broadstone Can Help
Need help assessing your firm’s readiness? Our consultants can support you in translating regulatory requirements into action-ready strategies.
Please get in touch with Broadstone’s Regulatory Analytics experts.
