The Bank of England (BoE) announced today the release of “Supervisory statement (SS) 4/25 – Enhancing banks’ and insurers’ approaches to managing climate-related risks,” its finalized new policy with stronger expectations for banks’ and insurers’ management of climate-related risks, across areas ranging from board and management accountability, climate risk integration, and climate-related data quality.

The new policy replaces the BoE’s initial 2019 supervisory expectations for firms’ management of climate-related risks, Supervisory Statement 3/19. The central bank signaled last year that it would begin work on updating the expectations, based on its learnings over the past five years.

According to the BoE’s Prudential Regulatory Authority (PRA), the new policy comes as some firms have made progress in developing their climate risk capabilities since the launch of the initial 2019 expectations, yet progress remains uneven, while the increasing frequency and intensity of climate events is creating growing threats to financial institutions.

The PRA said:

“Understanding and effective risk management of climate-related risks remains challenging and continues to evolve. The PRA’s updated expectations respond to industry calls for greater clarity and consistency, supporting firms as they build their resilience against climate-related risks.”

Key updates to the BoE’s climate risk expectations for banks and insurers under the new policy include strengthened governance arrangements by ensuring that firms’ boards and senior management are actively engaged in overseeing climate-related risks, enhanced risk management frameworks, with firms expected to adopt robust, transparent methodologies assumptions and oversight to assess and manage climate-related risks, requirements for firms to demonstrate a strong understanding of how climate scenario analysis informs business decisions, and for firms to critically assess climate-related data sources and address gaps in coverage and quality to support decision-making.

The new policy also includes bank-specific and insurance-specific expectations, and disclosure requirements for firms to align reporting with evolving international standards and to ensure consistency in reporting climate-related risks and opportunities.

The BoE noted that the approach of its policy recognizes that the impact of climate-related risks on the safety and soundness of a firm is likely to be driven by factors other than firm size, such as business model and geographical exposure, with the new expectations designed to be implemented proportionately, based on the materiality of the firm’s climate-risk exposure, in addition to allowing smaller firms to use less sophisticated approaches, as long as they still enable appropriate risk management.

The publication of the finalized new policy follows the release earlier this year of the BoE’s proposals to update SS3/19. With the release of the new policy, the BoE said that it made a series of changes to its initial proposals based on feedback, in areas including the proportionate application of the expectations and adding flexibility to the type of scenario analyses used, as well as allowing scenario analysis for longer time horizons to rely more on narrative scenarios and less on precise quantification. The BoE noted that the feedback was generally supportive, with no challenges to the case for regulatory action.

The new final policy comes into effect immediately, with firms required to conduct an internal review of their current status in meeting the new expectations, in order to identify areas that require further work, and to develop a credible plan for how they will address any gaps. The PRA said that it recommended that supervisors give firms at least six months before asking for evidence of the firms’ internal reviews and action plans.

Click here to access the BoE’s new climate-risk expectations.