Introduction

The Bank of England’s latest policy updates mark a significant shift in how climate-related risks are treated within the financial system. The new expectations signal that climate considerations are now fundamental to prudential supervision. As banks and insurers face growing exposure to physical and transition risks, regulators are moving toward more prescriptive oversight to ensure these threats are understood, measured and integrated into core decision making. This change reflects the reality that climate impacts are influencing financial stability today, not in a distant future.

Updated Expectations

The publication of PS25/25 and SS4/25 sets a clearer direction on governance, scenario analysis and data quality. Key areas of focus include:

• Strengthening board oversight and accountability for climate matters
• Expanding scenario analysis to inform strategy and capital planning
• Improving data quality and transparency to reduce reliance on unsupported assumptions

Institutions are now required to demonstrate progress on data development and to explain any limitations with clarity and evidence.

Integration of Climate Considerations

A central theme is the integration of climate considerations across established risk categories. Credit, market, liquidity and operational risks all need to reflect potential climate pathways in a forward looking manner. Scenario tools must move beyond exploratory exercises and provide insights that influence lending, underwriting and portfolio management.

Risk Type	Climate-Related Impact
Credit	Potential borrower stress, asset value changes or shifts in sector exposure
Market	Volatility driven by repricing of climate sensitive assets
Liquidity	Funding pressure during climate related events or market disruption
Operational	Disruptions from physical hazards or strain on internal processes

These expectations raise the bar on modelling capabilities and internal controls and highlight the need for stronger collaboration between risk teams, actuaries and business units.

Systemic Shifts

The broader system is also evolving. As insurers reduce their presence in areas facing increasing climate pressure, the financial risks do not disappear. They often shift to banks in the form of collateral volatility, borrower stress or concentrated sector exposure. The new guidance acknowledges this interconnectedness and reinforces that weak modelling, insufficient data foundations or limited board challenge can lead directly to higher capital needs. Climate considerations are becoming a test of overall risk governance maturity.

Implications for Financial Institutions

These developments carry meaningful implications for institutions of all sizes. Larger organisations will need to upgrade infrastructure and analytical capabilities, while smaller firms with material exposure must also demonstrate credible progress. Supervisors are signalling a greater focus on how climate insights influence real world decisions, not only how they are documented. This will reshape how financial institutions evaluate long term business models and engage with clients operating in climate sensitive regions.

Preparing for Change

Preparing for this new environment requires clear priorities. Firms should begin by assessing gaps against the updated expectations and building action plans with defined ownership and timelines. Strengthening data architecture, developing practical scenario tools and enhancing board and executive understanding are essential steps. By approaching climate considerations with the same discipline as traditional risk categories, financial institutions can support compliance while building greater resilience in a rapidly changing landscape.

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