The Prudential Regulation Authority published its 2024 business plan in April 2024, identifying climate risk management as a key supervisory priority for the year and signalling a step-change in the intensity with which the regulator will assess banks' and insurers' progress on embedding climate-related financial risk into their governance, risk management, and capital planning frameworks. The plan builds directly on 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.
The January letter established a clear and specific benchmark against which the PRA intends to evaluate firms during the 2024 supervisory cycle. Firms that cannot demonstrate adequate risk identification and measurement frameworks face the prospect of targeted supervisory engagement, requests for remediation plans, or — where deficiencies are assessed to be material — formal regulatory intervention. The 2024 business plan makes clear that climate risk is now treated as a mainstream prudential concern rather than a long-horizon sustainability aspiration, and that the PRA expects to see tangible evidence of capability, not merely policy documentation.
UPDATED SUPERVISORY STATEMENT IN PIPELINE
Among the concrete commitments the PRA has made in its 2024 business plan is the publication of an updated supervisory statement on climate-related financial risks, which will replace or substantially revise the existing SS3/19 framework. That statement, first published in 2019, set out the PRA's foundational expectations on governance, risk management, scenario analysis, and disclosure of climate risks. An update will incorporate methodological developments in climate risk quantification, lessons learned from subsequent supervisory engagement, and alignment with international frameworks including those developed by the Basel Committee on Banking Supervision and the Network for Greening the Financial System.
The PRA has also committed to publishing findings on the relationship between climate risk and credit losses — a topic of direct relevance to the prudential soundness of lenders' loan portfolios. Physical risks such as flooding, subsidence, and extreme weather events can impair collateral values and borrower creditworthiness in ways that existing credit risk models may not fully capture. Transition risks arising from carbon pricing, regulatory change, and shifts in energy costs can affect the viability of carbon-intensive business models that banks have financed, with potential knock-on effects on non-performing loan ratios.
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, a landmark exercise that 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.
For firms regulated by the PRA, the 2024 supervisory agenda represents a clear escalation of expectations. Having articulated what good practice looks like over several years of guidance and engagement, the PRA is now signalling that it will assess firms more rigorously against those standards and will take a less tolerant approach to institutions that have not made sufficient progress. The planned updated supervisory statement, once published, will provide the definitive reference document against which firms and their boards should evaluate the adequacy of their own climate risk frameworks.