During London Climate Action Week, one theme that echoed across the conversations I had was uncertainty. Financial institutions expressed feeling overwhelmed by the rapidly evolving regulatory requirements they are under, leaving many unsure of how to proceed.
Having advised many organisations on this topic, and perhaps as a way to calm myself in such an unpredictable space, I consistently offered the same message of reassurance: if your organisation has a robust understanding of its climate risks, you will be far better positioned not only to comply with today’s requirements but also to adapt to future changes. The key is getting the fundamentals right.
What’s behind recent uncertainty?
What was once voluntary guidance is rapidly becoming embedded in financial and corporate reporting frameworks. Consider the Prudential Regulation Authority (PRA), for example. Its 2019 Supervisory Statement (SS3/19) was a wake-up call for banks and insurers to start embedding climate risks into their governance, strategy, and risk management, primarily focused on raising awareness and setting expectations for financial institutions to begin building the necessary capabilities.
The PRA’s latest consultation, CP10/25, however, signals a clear shift from awareness-building to mandatory integration. Climate risk must now be treated on par with financial risks like credit or market risk, fully embedded within governance, risk appetites, internal controls and capital frameworks. This marks a move from qualitative, disclosure-based expectations to quantitative, risk-based management, with direct implications for balance sheets, solvency, and capital adequacy.
The smartest response is not to obsess over templates or disclosure formats but to focus on building a solid, decision-useful climate risk assessment.
Robust climate risk assessments should help uncover and manage a spectrum of climate-related risks and opportunities that could impact portfolios, lending, solvency, liquidity, and capital allocation. While regulatory requirements vary, the core objective of climate risk management remains the same: to protect asset quality and strengthen long-term financial resilience. When done effectively, a climate risk assessment is more than ticking a compliance box; it naturally aligns with regulatory expectations. The gained insights directly support the reporting requirements, because they are grounded in the same goal: understanding, managing, and mitigating material financial risks.
In this way, climate risk assessments become a critical tool that transcends compliance. It can be integrated into credit investment and portfolio decisions that ultimately preserve shareholder value and bolster market confidence in an economy undergoing rapid transition.
So, where does this leave financial professionals? In this dynamic landscape, the smartest organisations are those that focus on three core principles:
- Stay informed, but don’t get obsessed with the regulations: Understand the evolving regulatory landscape, from the PRA’s tightening requirements to international disclosure standards, but avoid getting lost in chasing compliance templates. The focus should be on substance over form, recognising that strong climate risk management naturally aligns with regulatory demands.
- Build climate risk assessments that drive decision-making: Regardless of the methodology or data constraints, your climate risk assessment should be practical and valuable. It needs to inform governance, shape strategy, guide portfolio management, and support day-to-day risk management, not sit in a silo. Getting the fundamentals right enables institutions to navigate uncertainty while maintaining operational resilience.
- Connect climate risks to core financial metrics: The most effective climate risk assessments translate climate insights into financial impacts, particularly on credit risk, liquidity, solvency, capital adequacy, and profitability. Financial institutions should focus on integrating climate considerations directly into existing risk frameworks, stress testing, and capital planning. This bridges the gap between sustainability narratives and concrete financial decision-making.
Regulations may change in the future, but your preparedness doesn’t have to. Whether the PRA adjusts its expectations or the UK SRS introduces new requirements, a strong climate risk assessment remains your best safeguard. Get in touch to assess your resilience.
