Introduction

The PRA has published a new supervisory statement SS4/25 setting out updated supervisory expectations for banks' and insurers' management of climate related risks, replacing supervisory statement SS3/19 in its entirety with effect from 3rd December 2025. It applies to all UK banks, building societies, PRA-designated investment firms, insurance and reinsurance firms.[1]

The full SS is available to download here:

https://www.bankofengland.co.uk/prudential-regulation/publication/2025/december/enhancing-banks-and-insurers-approaches-to-managing-climate-related-risks-ss

Consultation impact

The 59 responses to CP10/25 reflected a range of views, but the overall sentiment was considered supportive, with none challenging the case for regulatory action. No material changes were made between CP10/25 and SS4/25.

A summary of the consultation responses and the PRA resulting changes to draft policy can be found here: https://www.bankofengland.co.uk/prudential-regulation/publication/2025/december/enhancing-banks-and-insurers-approaches-to-managing-climate-related-risks-policy-statement

Our key takeaways

1. The bar has been raised

SS4/25 represents a clear uplift in expectations compared to SS3/19. Key areas of enhanced expectations in addition to those explicitly highlighted in our following key takeaways include:

• Moving beyond awareness of climate risk, to active oversight and senior accountability
• Proactive steps to identify and close data gaps
• Deeper integration of climate into existing risk frameworks, controls, and reporting processes

2. Immediate action is required from all firms

SS4/25 is live and replaces SS3/19 as at its release date, 3 December 2025. The PRA expects all firms to complete, within six months, an internal review of their current status in meeting the updated expectations and have developed a plan for addressing gaps. After 3 June 2026, supervisors may ask for evidence of these internal reviews and action plans but will not expect action plans to have been completed**.**

3. Firms of all sizes need to develop – at least foundational – climate scenario analysis (CSA) capabilities

SS4/25 encourages firms to take a proportionate approach. However, proportionality is based on exposure to climate-related risk not firm size. The PRA has outlined a two-step process to determine the materiality of climate-related risk exposure (step 1) then act proportionately (step 2).

In step one, all firms must “identify the material climate-related risks they are exposed to and understand how these risks could impact the resilience of their business model over relevant time horizons and under different climate scenarios”. If these risks are material, step 2 would require more in-depth CSA to inform business strategy, risk management, capital setting and valuation.

The nature of CSA exercises (including reverse stress tests) may vary from primarily narrative-based scenarios, quantified by expert judgement, to more mathematically sophisticated approaches, as appropriate. Importantly, the PRA expects firms to understand the design, application and limitations of the climate scenarios they use.

4. Targets need plans

The SS specifies that “Where a firm adopts goals or targets, the firm should be able to demonstrate, upon request, how its plan to meet those goals and targets, including the assumptions underpinning these plans, are integrated into a firm's overall strategy”.

Banks with net zero targets or commitments will therefore need to ensure continued demonstrable progress on interim targets and transition plans that detail how the net zero goals will be achieved (a trend already clear in our banking barometer).

5. Numbers beat narrative

The banking-specific expectations of the SS call for quantification of the impact of climate-related risks, both in step 1 to ascertain materiality and, for firms with material exposures, in step 2 where actions are applied. This means climate-related impacts – if material – need to be considered across a firm’s balance sheet, P&L, ECL models, ICAAP and ILAAP.

6. It’s not just about lending

SS4/25 makes clear that firms need to also consider their operational resilience, including whether any outsourcing and third-party arrangements are exposed to climate risk or may introduce risk to the firm through their activities (e.g. reputational risk). Firms need to consider this under “severe but plausible” scenarios, with the board setting the appetite and tolerance levels and exposures monitored using a range of quantitative and qualitative tools and metrics.

Conclusions

• The final supervisory statement significantly raises the bar when compared to the SS3/19 it replaces
• It takes effect immediately and all firms have six months – until 3 June 2026 – to conduct internal gap analysis and develop action plans
• Firms of all sizes will need to enhance their CSA capabilities, transition planning and ability to quantify the impacts of any material climate risks – not just in their lending but in their operations and supply chains too

[1] The full pathway was SS3/19 --> CP10/25 (consultation paper published 30 April 2025) --> PS25/25 (policy statement providing feedback to responses received on the consultation paper published 3 Dec 2025) --> which includes the PRA’s final policy, SS4/25 (also published 3 Dec 2025). Now breathe.