UK PRA's 2024/25 Business Plan Keeps Climate Risk a Key Supervisory Priority for Banks and Insurers

The Prudential Regulation Authority published its 2024/25 Business Plan on 11 April 2024, identifying climate risk management as a key supervisory priority for the year and stating that it will continue to assess banks' and insurers' progress on embedding climate-related financial risk into their governance, risk management, and capital planning frameworks. The plan follows a letter sent to regulated firms on 11 January 2024, which set out the PRA's expectation that institutions have robust and demonstrable processes in place to identify, measure, and manage climate-related financial risks.

UPDATED SUPERVISORY STATEMENT IN PIPELINE

Among the concrete commitments the PRA has made in its 2024 business plan is to commence work to update its supervisory statement on climate-related financial risks, SS3/19. That statement, first published in 2019, set out the PRA's foundational expectations on governance, risk management, scenario analysis, and disclosure of climate risks. The PRA has said the update will include, among other things, identified effective practice and developments in wider regulatory thinking.

The PRA has also committed to publishing thematic findings on banks' processes to quantify the impact of climate risks on expected credit losses.

BUILDING ON THE 2021 STRESS TEST

The PRA's 2024 supervisory agenda builds on a multi-year programme of climate risk work that includes the 2021 Climate Biennial Exploratory Scenario, which tested the resilience of the UK's largest banks and insurers to a range of long-term climate transition and physical risk pathways. That exercise identified areas of meaningful progress in firms' climate risk capabilities alongside material gaps, particularly in the ability to model physical risk impacts at loan portfolio level and to integrate climate factors into forward-looking credit risk assessments over relevant time horizons.

The PRA expects firms to make further progress, demonstrate how they are responding to its expectations and set out the steps they are taking to address barriers to progress.