Understanding PRA’s SS3/19: A deep dive into the current content

Updates to climate science, risk management practices, disclosure frameworks, and scenario analysis post SS3/19

UK climate commitment and global strategies: The UK aims to reduce greenhouse gas emissions by 81% by 2035[2] (compared to 1990 levels), as part of a broader strategy to lead in climate action, including investments in renewable energy, carbon capture, and support for developing countries. Globally, the EU, Japan, and the US have developed advanced climate risk management strategies, integrating climate information into disaster planning, conducting national climate assessments, and employing innovative flood protection measures.

Bank of England: Released its Climate Biennial Exploratory Scenario[3] to evaluate financial risks posed by climate change to major UK banks and (re)insurers through three scenarios: Early Action, Late Action, and No Additional Action. The objectives were to quantify climate risk exposures, understand business model challenges, and enhance risk management.

Basel Committee on Banking Supervision (BCBS): The BCBS published the “Principles for the Effective Management and Supervision of Climate-related Financial Risks[4] (2021)” which provide banks and supervisors with guidance on managing and supervising climate-related financial risks. They also published the latest Basel Framework Updates (2024)[5], which includes the full set of standards from the BCBS, has been updated to incorporate climate-related financial risks.

International Association of Insurance Supervisors (IAIS): The IAIS published the “Application Paper on the Supervision of Climate-related Risks in the Insurance Sector[6] (2020)” which provides guidance to supervisors on how to integrate climate-related risks into their supervisory frameworks and issued a paper on the Implementation of the Recommendations of the Task Force on Climate-related Financial Disclosures[7] (2020).

Network of Central Banks and Supervisors for Greening the Financial System[8] (NGFS): Published five phases of climate scenarios[9], which are updated annually with the latest data and policy commitments. These scenarios are used by central banks and regulators for local climate stress tests, helping firms assess portfolio resilience, and informing firms’ risk management and investment strategies. For (re)insurers, these scenarios help test the resilience of their capital management, risk management, and underwriting strategies.

International Sustainability Standards Board (ISSB): Published International Financial Reporting Standards (IFRS) S2[10] in October 2023 - an international standard on climate-risk management and disclosures, covering governance, strategy, risk management, and metrics. This standard aims to replace Task Force on Climate-related Financial Disclosures (TCFD) and align with other existing standards (GRI[11], SASB[12], CSRD[13]). There are some deviations between IFRS S2 and SS3/19.

Preparing for Regulatory Updates to SS3/19

We anticipate the SS3/19 update will align with these advancements. In preparation, let's review the current SS3/19 content.

Governance

SS3/19 lists several expectations for firms regarding their climate risk governance.

Board understanding and oversight:The PRA expects a firm's board to have a comprehensive understanding of the financial risks posed by climate change. The board should integrate these risks into the firm's overall business strategy and risk appetite, taking a long-term view that extends beyond standard business planning horizons.

Monitoring and managing risks:Firms are expected to provide evidence of how they monitor and manage climate-related financial risks in line with their risk appetite statements. These statements should include risk exposure limits and thresholds for acceptable risk levels, considering factors such as:

• The long-term financial interests of the firm and the impact of current decisions on future risks.
• Results from stress and scenario testing over various time horizons.
• Uncertainty regarding the timing and channels through which climate risks may materialise.
• Sensitivity of the balance sheet to changes in key risk drivers and external conditions.

Roles and responsibilities:The PRA emphasises the importance of clear roles and responsibilities for managing climate-related financial risks. The board and senior management should allocate these responsibilities to the appropriate Senior Management Functions (SMFs) within the firm's organisational structure. These responsibilities should be documented in the SMFs' Statements of Responsibilities. The board and its sub-committees must exercise effective oversight of risk management and controls, ensuring that adequate resources, skills, and expertise are dedicated to managing these risks.

Scenario analysis

Firms have taken positive steps to embed the PRA’s supervisory expectations regarding scenario analysis. In SS3/19, the PRA sets out the following expectations:

Strategic planning: Firms should use ‘scenario analysis to inform their strategic planning and determine the impact of the financial risks from climate change on their overall risk profile and business strategy’, notably in relation to solvency and liquidity for banks and the ability to pay policyholders for insurers.

Transition paths: Scenario analysis aims to understand the impact of different transition paths to a low-carbon economy on a firm. This includes the path where no transition occurs.

Range of horizons: Firms should look to quantify short-term climate risks where the exposure to financial risk from climate change exists within a business planning horizon. Where the horizon is longer term, the firm should operate a qualitative exercise which can be used to inform strategic planning and decision making. The PRA expects the longer-term assessment to be in the order of decades and thus accepts that the forecast may be less precise.

Mitigation: The PRA expects management to mitigate the financial risks from a scenario. For example, management should not rely on liquid markets to sell brown assets (i.e.: oil and gas) which may possibly become frozen assets.

Frameworks: The PRA judges the Own Risk and Solvency Assessment (ORSA) and Internal Capital Adequacy Assessment Process (ICAAP) to be useful frameworks within which insurers and banks, respectively, can consider the financial risks presented by climate change. For insurers, the Solvency II framework (recently modified by the PRA’s Prudential Statement 15/24, which is set to take effect on the 31st of December 2024) states that firms must consider the long-term horizon in their scenario analyses to adequately assess their ability to operate successfully over time. For banks, the PRA’s SS31/15 on the ICAAP also contends that firms should employ scenario analysis to explore potential sensitivities in their long-term business plans.

Risk management

The PRA has several expectations of firms regarding risk management.

Methodology: Firms are expected to address financial risks from climate change through their existing risk management frameworks, aligning with their board-approved risk appetite. They ought to have a strategic approach that is proportionate to their business and that enables them to identify, measure, monitor, manage, and report on exposure to those risks.

Documentation: Firms should document this process in their risk management policies, management information, and board risk reports, updating these documents as necessary to reflect the evolving nature of climate-related risks.

Risk identification: To effectively identify and measure climate-related financial risks, banks and (re)insurers should use scenario analysis and stress testing. The PRA emphasises the importance for firms to go beyond historical data to inform their analysis and to consider future trends in risk and developments in climate science. This approach should be integrated into the ICAAP or ORSA, ensuring that all material exposures are assessed and documented.

Ongoing oversight: Monitoring and managing these risks require a combination of quantitative and qualitative tools and is expected to evolve and mature over time. The PRA expects this information to be provided to the board and relevant sub-committees. This tool will support decision-making processes and align with firms’ overall business strategy and risk appetite.

Credible plans: The PRA also expects firms to have credible plans in place to mitigate material financial risks from climate change, including actions to reduce risk concentrations. These plans should be developed using risk assessment and management practices that consider both current and future predicted impacts of climate-related risks. When available information is insufficient, firms are expected to engage with clients and counterparties where this information is considered material to a firm’s own risks.

In addition to Solvency II, regulators expect (re)insurers to adhere to the Prudent Person Principle, which mandates diversification to avoid excessive risk accumulation.

Disclosure 

Firms have existing requirements to disclose information on material risks in their Pillar 3 reports, as mandated by the Capital Requirements Regulation (CRR) for banks and Solvency II for (re)insurers, and in their Strategic Reports under the UK Companies Act. In addition to meeting these requirements, firms should consider disclosing any supplemental information that enhances transparency vis-à-vis their approach to managing financial risks from climate change. In particular, firms should disclose how climate-related financial risks are integrated into governance and risk management processes.

Approach: Firms should develop a dynamic and insightful approach and should recognise the possibility that disclosures will be mandated in more jurisdictions as climate change persists. The PRA expects firms to engage in wider initiatives and to consider the benefit of disclosures that are comparable across firms. It refers directly to the TCFD to ensure comparability and benefit from shared tools and case studies.

Get in touch

If you’re looking for tailored support to navigate the evolving requirements of SS3/19, our team of experts is here to help. Contact us today to discuss your needs and learn how we can assist your organisation in achieving compliance while driving sustainable growth.

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Sources

[1] SS319 

[2] UK shows international leadership in tackling climate crisis - GOV.UK

[3] Results of the 2021 Climate Biennial Exploratory Scenario (CBES) | Bank of England

[4] Principles for the effective management and supervision of climate-related financial risks

[5] Basel Framework

[6] Application Paper on the Supervision of Climate-related Risks in the Insurance Sector

[7] Issues Paper on the Implementation of the Recommendation of the Task Force on Climate-related Financial Disclosures

[8] NGFS

[9] NGFS phase V climate risk scenarios: good progress however unaddressed limitations remain - Forvis Mazars - United Kingdom

[10] IFRS - IFRS S2 Climate-related Disclosures

[11] The Global Reporting Initiative (GRI) is an independent not-for-profit organisation that provides standards for sustainability reporting to help organisations understand and communicate their impacts on the economy, environment, and people.

[12] The Sustainability Accounting Standards Board (SASB) develops industry-specific standards to help businesses disclose financially material sustainability information to investors

[13] The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation that requires large companies and listed companies to report on their social and environmental impacts, aiming to enhance transparency and accountability