Out-Law News 1 min. read
08 May 2025, 3:30 pm
A new consultation on enhancing the way UK banks and insurers approach climate-related risk management has highlighted the “potential for significant systemic adverse impact” from climate change, according to experts.
Published by the Prudential Regulation Authority (PRA), the consultation outlines what climate risk scenario analysis the UK financial services regulator expects banks and insurers to carry out.
The consultation will be open until 30 July.
Hayden Morgan, climate risk and sustainable finance expert at Pinsent Masons, said: “The PRA has identified that financial and economic losses related to climate change are projected to increase over time, and although the magnitude and timing of losses are uncertain, there is a recognition that such risks are systemic in that they will impact customers and firms in all sectors of the economy.”
“The PRA also acknowledges that climate change risks are not linear, and are subject to tipping points, based on accepted scientific principles,” he said. “The PRA considers that these risks are on a greater scale than any other risks that firms have experience in modelling and managing, with the potential for significant systemic adverse impact for banks and insurance firms.”
The proposals contained within the consultation build on the existing Supervisory Statement and enhance the supervisory expectations on how firms should address climate-related risks to increase economic resilience.
David Bailey, the executive director of prudential policy at the Bank of England, said that although the new expectations are likely to impose short-term costs on firms, those initial costs are likely to be offset by the benefits “arising from improved identification and management of an important class of emerging risk, which will persist over the medium to long term.”
James Dunham, an expert in climate risk and sustainable finance at Pinsent Masons, said: "In times of political instability, scenario analysis becomes an indispensable tool for banks and insurers to anticipate and manage potential climate-related risks. This practice is not solely driven by regulatory mandates; financial institutions increasingly recognise the strategic value of climate scenario analysis in making informed decisions.”
“The consultation paper underscores the importance of embedding robust climate risk practices into firms’ governance, risk management, and business strategies,” he said.
“The Bank of England's Climate Financial Risk Forum already offers robust guidance to help the financial institutions approach and effectively address climate-related financial risks”.