SS 5/25 Webinar: Final climate risk management expectations for FS firms

Proportionality means focusing most of the small regional building societies’ efforts on the most material exposures and risks as per the materiality assessment for climate scenario analysis, risk management and data for instance. Material physical risks would typically include flooding, soil subsidence or windstorm for instance. However, the level of modelling complexity and sophistication and the number of scenarios would be lesser than for larger institutions. These building societies would still need to comply with governance, ICAAP / ILAAP and disclosure requirements.

Firms should focus on material exposures and material climate risks as per their materiality assessments to use more advanced climate scenario capabilities to quantify climate risk. Larger firms will likely develop in-house models while smaller firms may rely on external provider. In both cases, firms are expected to fully document methodologies, assumptions and limitations.

SS5/25 materially expands ICAAP expectations by requiring fuller climate‑risk disclosures, integration into risk frameworks, and incorporation of forward‑looking scenario analysis. It also significantly influences Pillar 2A, where climate risks must now be embedded across all major risk types and may lead to revised or higher capital add‑ons. However, it does not change Pillar 1 capital rules, with any impact remaining indirect through modelling adjustments rather than regulatory formula changes.

For insurers, the PRA's approach has intentionally been to maintain broad alignment with international developments and practice, but with an intentionally pragmatic approach around materiality and size of firm (aligning to their objective around competitiveness of the UK market). The PRAs statement requires firms to treat climate risk with the same rigour as financial risks. That is consistent with for example the IAIS approach where the underlying ICPs are unchanged but guidance about how to apply them was issued. In terms of EIOPA specifically, some of the key differences that insurers should be aware of are: EIOPAs materiality assessments are more prescriptive and stringent, EIOPA is considering additional capital requirements for fossil fuel exposures although not there yet, the PRA is stronger on the need for CSA to be understood and used in decision making (EIOPA it is implicitly required through the ORSA but application is inconsistent).

For banks, expectations are broadly in line with those from the EBA and the ECB. However, the PRA emphasized more the importance of data and strong documentation due diligence for instance.

Climate risk is a real risk that could have significant impacts on the sustainability and resilience of firms business models – really understanding and managing that risk is a “benefit” in and of itself.

Use the improvements in data, modelling and metrics to make business decisions – consider how your underwriting or investment strategies could be adapted, rigorously challenge your potential future management actions and have plans in place on how and when you would deploy them.

In the short term, firms will need to select an SMF in charge of climate risk. We may also see a shift in the medium term of climate risk becoming more a strategic and business planning priority. Firms will also need to allocate more resources to climate scenario analysis capabilities.

Scenario-based sensitivity analysis (SBSA) may be used for proportionality reason or actual stress testing purpose. From a proportionality perspective, SBSA is less resource and modelling consuming than RST and could better fit a small- to mid-sized firm’s needs. It could also be sufficient for exposures and risks which are not very material.

From a stress testing perspective, it could also better fit the firm’s risk profile in case the climate risks under focus can never be stressed enough (with plausible assumptions) for the firm to fail. In that case, stressing climate risks through credit risks with scenarios that are more severe but still plausible could be acceptable.

SS5/25 requires firms to provide transparent, decision‑useful disclosures explaining how climate risk is integrated into governance, risk management, scenario analysis, and data processes, with alignment to emerging international standards such as the ISSB and the TCFD structure. It does not introduce a new standalone disclosure regime but expects consistency across ICAAP/ILAAP, solvency reporting, and broader sustainability‑related financial disclosures.

It will vary across firms. Larger firms will likely develop their own approaches and capabilities while smaller firms will rely more on external tools, such as Forvis Mazars’ CliMate web tool for climate scenario analysis (Climate risk management - Forvis Mazars)

No, ISSB (IFRS S1 and S2) relate to reporting and disclosure standards which will be adopted by the UK.

From the materials in your enterprise documents, the PRA’s SS 5/25 expects the Board to hold clear accountability for climate risk, with senior management functions explicitly responsible for sponsoring and embedding it.

Across multiple SS5/25 summaries and presentations, the PRA states that Boards must take clear accountability for climate‑related risks, embedding them into strategy and oversight.

Climate risk must be integrated into governance frameworks with senior management ownership, and linked to the Senior Managers & Certification Regime (SM&CR)—implying that an SMF holder, should act as the executive‑level sponsor. However, it is up to the firm to decide which SMF holder will act as the executive-level sponsor.

Although SS 5/25 contains no treaty‑specific text, the general insurance expectations make it clear that the PRA expects firms to:

• analyse reinsurer counterparty credit risk under climate scenarios
• assess concentration and aggregation risk across treaty panels
• evaluate recoverability and treaty performance under climate‑driven stress
• improve data quality and visibility into counterparty exposures

There is no specific expectation on how to present the gap analysis, materiality assessment and implementation plan. However, the PRA expects firms to do these assessments thoroughly with clear actions, owners and dependencies, going through each asset class, climate risk and financial risk.

Although the PRA has not specified any particular timescale to close the gaps, we would expect firms to set up ambitious timescales noting that the requirements are largely unchanged from those put forward in the consultation paper.

This would depend on the exact situation. UK branches are out of scope but PRA regulated UK entities are in scope. The materiality and proportionality considerations would overall apply to the in-scope entity, however, from a stand back perspective it could be difficult for example to justify not leveraging tools and data that may be available at a group level based purely on materiality of the UK entity.

Firms are expected to report on their climate exposure and management periodically via their ICAAP, ILAAP and annual reports for instance.

SS 5/25 does not introduce or signal the creation of a new dedicated regulatory reporting framework (e.g., a “Climate COREP”). Instead, the materials repeatedly state that climate‑risk requirements are to be embedded into existing prudential processes—ICAAP, ILAAP, governance, risk management, scenario analysis, and disclosures—with no standalone climate reporting templates being introduced by the PRA.

The regional building society’s liquidity profile may be impacted by different factors:

• Deposit outflows driven by physical climate events
• Reputational and transition‑risk‑driven shifts in customer behaviour:
  • Outflows if customers feel the building society is not aligned with climate goals.
  • Inflows if it is seen as a green leader (which itself creates volatility).
• Collateral value deterioration reducing contingent liquidity
• Insurance market stress feeding into liquidity needs
• Regulatory pressure leading to higher liquidity requirements. The PRA may impose:
  • higher P2L guidance,
  • stricter internal limits on deposit concentration,
  • enhanced stress scenarios assuming persistent outflows.
• Impact on business model, earnings, and ability to generate liquidity internally. Climate‑driven credit risk can reduce future profitability (via higher impairments), which in turn:
  • limits retained earnings,
  • slows organic liquidity generation,
  • reduces management flexibility to withstand deposit shocks.

The PRA would expect firms to focus on more material suppliers.