Prudential Regulation Authority Urges Banks And Insurers To Address Climate Oversights

The UK’s financial regulator has issued a sharp warning to banks and insurers, urging them to treat climate change as a material financial risk rather than a reputational concern. In a recent review, the Prudential Regulation Authority (PRA), part of the Bank of England, found that most institutions are failing to integrate climate-related risks into their core risk frameworks, despite growing regulatory and market expectations. The message is clear: climate risk is no longer a peripheral issue—it is a financial reality demanding immediate and substantive action.

Climate Risk as Reputation Management

The PRA’s findings stem from a broad assessment of UK banks and insurers, examining how firms are embedding climate considerations into their governance, risk management, and strategy. The outcome was underwhelming. According to the PRA, most firms still treat climate change as a reputational issue—something to be managed for public perception or investor relations—rather than a source of real financial exposure.

In too many cases, the regulator found, climate risk is not integrated into the day-to-day business or capital planning processes. Stress testing, scenario analysis, and asset-liability evaluations rarely factor in climate pathways. In governance terms, while boards often reference climate in public statements, oversight is inconsistent, and meaningful engagement from senior leadership is limited or poorly defined.

The Material Nature of Climate Risk

The regulator’s concern is rooted in the increasingly visible financial impacts of climate change. Climate-related risks fall into two broad categories: physical risks and transition risks. Physical risks include extreme weather events, rising sea levels, and natural disasters—events that can destroy physical assets, disrupt supply chains, and reduce the value of collateral underpinning loans or insurance policies. Transition risks, on the other hand, arise from the policy, legal, and technological shifts involved in moving toward a low-carbon economy. These include carbon pricing, the devaluation of fossil fuel assets, and changing consumer preferences.

The PRA emphasized that these are not hypothetical risks. They are already influencing market behaviour, asset valuations, and liability exposures. A failure to recognise this exposes institutions to mispriced credit risk, weakened portfolios, and systemic vulnerabilities that could compromise financial stability.

Regulator Expectations: From Disclosure to Integration

While the PRA has not yet announced new binding rules, its messaging sets the tone for future supervisory and policy direction. The review outlined several key areas where institutions must improve:

• Governance: Boards and senior management must demonstrate clear accountability for climate-related risks, including setting strategic direction and allocating resources appropriately.

• Risk Management: Firms are expected to embed climate risk into existing risk categories (e.g., credit, market, operational) and develop metrics to monitor exposures.

• Scenario Analysis: The PRA is encouraging firms to conduct robust climate scenario testing that goes beyond tokenistic exercises, using plausible pathways to assess vulnerabilities over medium- and long-term horizons.

• Disclosures: Alignment with frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and upcoming International Sustainability Standards Board (ISSB) standards is expected, with transparency playing a critical role in market discipline.

The tone is advisory—for now. But the implication is clear: failure to act could result in enforcement measures or capital requirements in the near future.

Industry Response: Uneven Progress, Persistent Gaps

The industry’s response to climate regulation remains mixed. Some leading banks have developed climate risk teams and integrated ESG factors into loan underwriting and investment decisions. Others continue to treat climate risk as a sustainability issue detached from financial core functions. The insurance sector, with its long history of catastrophe modelling, is in some ways better equipped—but even here, adaptation has been patchy.

Practical challenges abound. Reliable climate data remains limited, especially for small and medium-sized enterprises. Climate models can be highly complex and are difficult to translate into quantifiable financial exposures. Many firms lack the internal expertise or technology to develop bespoke risk tools, and the costs of transition remain a significant barrier for smaller players.

Nonetheless, regulators are unlikely to accept these limitations as excuses for inaction. The PRA’s review is not just an assessment—it is a signal of rising expectations and looming scrutiny.

Implications for UK’s Green Finance Ambitions

The PRA’s intervention comes at a time when the UK is seeking to cement its position as a global hub for green finance. Post-Brexit, the government has promoted regulatory agility and ESG leadership as comparative advantages. Yet that ambition will ring hollow if its largest financial institutions are not equipped—or willing—to manage the risks associated with climate change.

The warning also aligns with broader efforts by the Financial Conduct Authority (FCA), the Treasury, and the Bank of England to elevate climate considerations across the regulatory ecosystem. This includes mandatory climate disclosures, integration of ESG into fiduciary duties, and an increasing focus on the role of capital in supporting the transition to net zero.

If firms fail to take this guidance seriously, they risk being left behind as investor expectations, consumer demand, and international standards evolve. More importantly, they risk undermining the very stability they are designed to uphold.

Conclusion: From Rhetoric to Risk Management

The PRA’s message is not about optics—it is about substance. Climate risk is no longer a distant or hypothetical threat. It is a source of real, measurable financial impact, and one that demands a robust response from the financial sector.

Firms that treat climate as a branding exercise rather than a strategic imperative will not only fall short of regulatory expectations—they will face mounting exposure to legal, financial, and operational consequences. The transition from awareness to action is no longer optional. It is a baseline requirement for financial resilience in a warming world.

Author: Brett Hurll