UK financial firms face tough new climate risk rules from Bank of England

The Bank of England’s Prudential Regulation Authority’s supervisory statement sets out much stronger expectations on banks, building societies, investment and insurance bodies towards how they should manage and identify climate change related risks in the race for net zero.

Companies will have until 3 June 2026 to carry out a full internal review of their current approaches, and how they intend to meet the stringent new policies being brought into effect, with the new supervisory statement replacing in full one last updated six years ago.

Hayden Morgan, a sustainability expert with Pinsent Masons, said the stricter rules indicated the lessons learned over the last few years.

“Despite some progress since 2019, adoption remains uneven, and the growing frequency of climate events poses systemic risks,” he said.

“From this new guidance, boards and senior management must take active oversight of climate risks. Firms will need robust frameworks, with transparent methodologies and scenario analysis capabilities. In addition, improved data quality and alignment with international disclosure standards are essential.

“They will need to embed climate resilience into their strategy and operational implementation.”

Under the new rules, board accountability for managing climate risk becomes much more focused, with management required to show clear approaches for dealing with climate related challenges – including a material inclusion of climate policy within company risk management frameworks.

Data used to judge risk is now to be assessed for depth and reliability, with an emphasis on providing in-depth information for risk management planning now a requirement, while disclosure reporting is expected to be aligned with international standards.

Alongside these, though, firms are advised their risk identification and assessment processes should be proportionate for when and how likely risks are, allowing for narrative approaches alongside data-driven ones for scenarios with less available information.

Extra focus for banking and insurance firms will require them to disclose both risk and opportunity in their assessments for investors, to enable better tracking of transitional sectors.

The PRA notes in the statement the new expectations on firms are aimed at helping to build resilience against climate-related risks and strengthen their risk management capabilities.

Elizabeth Budd, a financial services expert with Pinsent Masons, said the new rules were reflective of the shift of greater knowledge and planning around climate change.

“The dial has moved on people’s understanding of climate change risk in the last six years and as the regulator says this is building on the 2019 position, rather than introducing something completely new,” she said.

“Although the Bank of England’s expectations have increased, nonetheless this regime will apply in a proportionate manner.”