Prudential policy and supervision

Prudential supervision

The risks from the physical effects of climate change, as well as the transition to net zero, pose a threat to the stability of the wider financial system, and the safety and soundness of firms we regulate.

In April 2019, building on both our 2015 insurance report and 2018 banking report on the impacts of climate change for these sectors, we became the first central bank and supervisory authority to set supervisory expectations for PRA-regulated banks' and insurers' (firms) management of climate-related financial risks. This strategic approach to managing climate-related financial risks, included expectations on governance, risk management, scenario analysis and disclosure.

We followed this up with a ‘Dear CEO letter’ to firms in 2020. This letter set out more detailed guidance on how firms should embed their approaches to managing climate-related financial risks by the end of 2021. This letter built on the expectations set out in Supervisory Statement 3/19, and provided observations on good practice and set out next steps for implementation.

In October 2021, we published our second climate change adaptation report (CAR) which set out the progress firms have made on managing climate-related risks, our supervisory strategy for 2022, and the potential role of capital requirements.

From 2022 onwards, we moved towards actively supervising regulated firms against the supervisory expectations set out in SS3/19. Addressing the risks from climate change is now a core component of our supervisory approach, and we expect firms to meet these and to make improvements where these are required.

The PRA subsequently reviewed firm’s progress in embedding expectations, and found that overall, firms were taking positive and concrete steps, however, further progress is needed by all firms. In October 2022, we published a Dear CEO letter to provide thematic feedback to firms on their progress on embedding SS3/19 and from undertaking the Climate Biennial Exploratory Scenario (CBES).

In March 2023, the Bank published a report on climate-related risks and the regulatory capital frameworks. This report set out the Bank’s latest thinking on the extent that climate-related risks might be captured by the regulatory capital frameworks, and focus areas identified in the 2021 CCAR to understand the materiality of the gaps.

In April 2025, the PRA published CP10/25, to consult on proposals to enhance banks' and insurers' management of climate-related risks (originally set out in SS3/19). Given the evolving risk landscape of climate change and the findings set out in the 2022 DCEO letter. The PRA's assessment indicated that further progress was needed by all firms to demonstrate effective management of climate-related risks. CP10/25 aims to consolidate existing published material and firm feedback, reflect new international guidelines and provide clearer expectations and detail on the specific areas of governance, risk management, scenario analysis, data and disclosures. The consultation closed on 30 July 2025 and the review process is underway.

Climate Financial Risk Forum

In March 2019, together with the Financial Conduct Authority (FCA), we established the Climate Financial Risk Forum (CFRF) to build capacity and share best practice across industry and financial regulators to advance our sector’s responses to the financial risks from climate change. The forum is chaired by David Bailey (Executive Director, Prudential Policy, Bank of England) and Sheldon Mills (Executive Director, Consumers and Competition, FCA).

It brings together senior representatives from across the financial sector, including banks, insurers and asset managers. During its work, the forum has convened various working groups to produce practical guidance incorporating best practices in areas such as risk management, scenario analysis, disclosure and innovation and the transition to net zero.

In June 2020, the CFRF published its guide to help the financial industry approach and address climate-related financial risks.

In October 2021, the second round of guides were published to further help the financial sector develop best practices to manage climate-related financial risks and opportunities. These guides are written by industry, for industry and build on the 2020 guide, focussing on risk management, scenario analysis, disclosure, innovation and climate data and metrics. The guides aim to help firms accelerate their efforts in responding effectively to climate-related financial risks and opportunities. In particular, the risk appetite statements, scenario analysis guide, disclosure case studies and the climate data and metrics dashboard have been designed to support firms overcoming the significant challenges that they have encountered so far in embedding climate risk management in their organisations.

The CFRF’s third round of guides and other materials, such as webinars and metrics dashboard, were published in two tranches, in December 2022 and March 2023. Continuing to build on the CFRF’s previous publications focus on three areas: scenario analysis; climate disclosure, data and metrics and the findings from a new working group focussing on the transition to net zero.

In October 2024, the CFRF fourth round of guides were published focusing on short-term scenario analysis, nature and adaptation.