Climate change moves up the regulatory agenda for financial services

Supervisory Statement SS 3/19, first published by the Prudential Regulation Authority (PRA) in 2019, sets out expectations for how UK banks, building societies and insurers should manage the financial risks from climate change. It covers governance arrangements, risk management practices, scenario analysis, and disclosure requirements, and reflects the PRA’s approach to embedding climate risk in the financial system.

In April 2025, the PRA issued a significant update, signalling a clear shift from expectation to enforcement. Climate risk is no longer a distant concern for financial institutions—it is a supervisory priority and an integral part of business strategy, decision-making and sustainability planning. Mortgage lenders must now take immediate steps to review and evidence how they are addressing climate-related financial risks across their operations.

With the consultation period closing on 30 July 2025 and revised expectations taking effect immediately thereafter, firms have just a few months left to align. For UK banks and building societies, this means moving fast and implementing effective solutions to ensure compliance with the PRA’s expectations.

What’s changed in the latest SS 3/19 update

The PRA’s updated SS 3/19 introduces more stringent supervisory expectations and a firmer supervisory stance:

• Firms must review lending strategies, business models, risk mitigation and risk appetite frameworks and policies in the context of climate change related risk.
  
  

• Any gaps must be clearly identified, with evidence provided of actions taken to address them, and outputs documented for supervisory review.
  
  

• Documentation and reporting are no longer optional. Quantitative and qualitative tools and metrics must be used to monitor exposure to climate risks.

The PRA’s expectations align with the broader regulatory landscape and international standards. This includes embedding climate considerations into ORSA (Own Risk and Solvency Assessment), ICAAP (Internal Capital Adequacy Assessment Process), and disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Overall, these enhancements place clear emphasis on governance frameworks, scenario analysis, data quality and integration, and the need to embed climate considerations into day-to-day risk management processes and risk appetite decisions.

What the update of the PRA’s Supervisory Statement means for banks and building societies

For financial services providers, including lenders, banks and building societies, the implications are significant:

• There will be increased scrutiny on real estate lending portfolios, especially with regard to physical risks related to climate change such as flooding, subsidence, fire, and coastal erosion.

  
  

• Firms must move from general climate awareness to specific, measurable assessments of their climate risk exposure, aligned with international standards such as TCFD and ORSA.

  
  

• Senior management must demonstrate ownership of climate risk management and align practices with the firm’s overall business strategy and capital requirements.

  
  

• Lenders must integrate climate risks into underwriting, credit risk assessment, pricing, and portfolio monitoring.

  
  

• This requires a solid foundation of accurate, property-level data to evaluate environmental performance, EPC ratings, and sustainability risks.