PRA and FCA climate adaptation reports
The PRA’s latestÌýÌýsummarises key work performed to date, as well as the PRA's latest views of firms' progress in managing climate-related risks. The report references the PRA's planned update of the expectations in SS3/19, with a consultation expected in 2025 followed by an updated supervisory statement. The Climate Financial Risk Forum (CFRF) will provide a forum for industry to share experiences and build on existing guidance to help firms meet revised supervisory expectations. Meanwhile, the Bank of England continues to assess the potential build-up of systemic risks relating to climate change.
The FCA’sÌýÌýnotes that the insurance sector faces increased claims due to extreme weather events, and highlights concerns about the future affordability and availability of insurance. Banking adaptation risks include reduced mortgage lending due to reduced flood insurance availability and increased defaults in commercial lending following climate-related economic downturns. Investment risks involve volatility in agricultural markets and water shortages impacting companies. The existing response to climate adaptation has involved FCA-mandated climate risk disclosures and industry collaboration through the Climate Financial Risk Forum (CFRF), but there continue to be barriers around data availability, insurance underwriting approaches and allocation of capital to climate adaptation.
EBA final guidelines on management of ESG risks
The EBA has finalised itsÌýÌýon the management of ESG risks for banks. The guidelines cover detailed requirements on materiality assessments, identification and measurement of ESG risks, managing and monitoring ESG risks, and transition plans. They will apply from 11 January 2026 except for small and non-complex institutions (SNCIs), for which they will apply at the latest from 11 January 2027.
Key points include:
- Materiality assessment: firms should consider the impact of ESG risks on all traditional financial risk categories, and use short, medium and long-term time horizons. Materiality assessments should be performed at least every year, or every two years for SNCIs.
- Identification and measurement: the EBA provides detailed guidance on conducting exposure, portfolio, and scenario-based assessments. Additionally, firms should consider collecting specific data points for large corporate counterparties, such as geographical location of key assets and dependency on fossil fuels.
- Strategies and business models: firms should consider ESG risks when developing and implementing their business and risk strategies, including how ESG risk factors can affect business model viability and targets in their transition plans.
- ICAAP and ILAAP:Ìýmaterial effects of ESG risks should be incorporated into ICAAP and ILAAP, including a description of risk appetite, threshold and limits set for ESG risks on solvency and liquidity.
- CRD-aligned plans: firms� CRD-aligned transition plans should be integrated into their business strategies, and consistent with risk and funding strategies, risk appetite, ICAAP and the risk management framework.
EBA consultation on ESG scenario analysis
The EBA isÌýÌýon ESG scenario analysis guidelines for banks. The guidelines cover scenario analysis to test a firm's financial resilience in the short to medium term, verifying its capital and liquidity adequacy, and long-term analysis to challenge business model resilience and help navigate an uncertain future. There are three key sections in the consultation:
- Uses of scenario analysis and proposals for a progressive and proportionate approach;
- What is required before undertaking scenario analysis and the criteria for setting scenarios and identifying transmission channels; and
- The distinctive features of climate stress testing and how it can test the robustness of a firm's business model and strategy in a range of plausible futures.
The EBA notes that while firms mainly focus on climate scenario analysis, it expects them to develop their tools and practices progressively to cover a wider range of environmental and other ESG risks, such as increased risk of disease outbreaks, human migration, ecosystem collapse and species extinction, terrorism and warfare, and political instability, which are often interrelated with or amplified by climate-related risks.
The consultation deadline is 16 April 2025 and the EBA intends to finalise the guidelines in H2 2025. The guidelines will apply to most firms from 11 January 2026 and to small and non-complex institutions (SNCI) from 11 January 2027.
EBA report on availability and accessibility of ESG risk data
The EBA has published aÌýÌýassessing the availability of ESG risk data and the feasibility of a standardised methodology to ‘identify and qualifyâ€� banking book credit exposures to ESG risks. It focuses on the impact of ESG risks on credit risk and the potential for using existing elements such as sustainability disclosure frameworks, supervisory stress testing and ESG scores in credit risk ratings to support a common methodology.
Key findings include:
Data Availability
- Data is most readily available for large corporates and mortgage exposures, primarily for climate risk (transition risk for corporates).
- Significant data gaps exist for social and governance risks, and for other exposure classes like SMEs.
Methodologies
- Methodologies for assessing environmental risks, particularly climate risks, are the most advanced.
- Social and governance risk assessments are mostly qualitative.
- ESG scores are commonly used, but challenges include variability due to differing approaches, data sources and rating providers.
- Linking ESG risk to credit risk remains nascent.
Standardised Methodology Feasibility
- Currently, a robust, standardised methodology is not feasible due to the incomplete data landscape and ongoing development of key elements.
- A sequenced approach, starting with climate risks for large corporates, may be most feasible.
Future Considerations
- Full implementation of the CSRD is expected to significantly improve the ESG data landscape for the corporate sector.
- Further development and support for voluntary standards for SMEs is needed.
- Supervisory stress testing and scenario analysis targeting climate-related financial risks are still in an exploratory phase.
- More transparency is needed on the role of ESG factors in external credit ratings.
EIOPA Solvency II consultations on biodiversity and sustainability Ìý
As part of the Solvency II review process, EIOPA ran twoÌý, which closed on 26 February, on biodiversity risk management and managing sustainability risks.
Biodiversity risk management:ÌýEIOPA noted that biodiversity loss can result in significant economic risks, affecting the value of investments, the frequency and intensity of insured losses, and the overall risk profile of insurersâ€� portfolios. It identified significant investment exposure in the insurance sector to assets dependent on nature and ecosystem services, which may indicate an exposure to biodiversity risks.ÌýThe consultation focussed on defining biodiversity and risk drivers for insurers, identifying current market practices on biodiversity risk assessment, and how biodiversity can be considered in the Solvency II framework.
Managing sustainability risks:Ìýthe consultation aimed to establish a coherent and proportionate approach to sustainability risk management, including the development (and partial disclosure) of sustainability risk plans. The consultation explored the relationship of sustainability risk plans with ORSAs, transition plans, and other reporting and disclosure requirements.
EIOPA will consider stakeholder comments and publish revised papers in the summer of 2025.
EIOPA consultation on a natural catastrophe tool
EIOPA’sÌýÌýon a Nat Cat tool to raise awareness on potential risks and prevention measures closed on 28 February. EIOPA noted that climate change is leading to more frequent and intense natural hazards, increasing the risk of property damage and higher insurance premiums. Raising awareness about natural hazards and climate risks is therefore crucial for citizens and insurers.
Proposals for key information in the tool included:
- Risk score to natural hazards based on property location
- Risk prevention measures for common perils
- Information on insurance coverage, being aware of exclusions, and national insurance schemes for natural catastrophes
EIOPA will publish a final paper on the Nat Cat tool at the end of the year.
Proposals from ECB and EIOPA to reduce economic impact of natural catastrophes
The ECB and EIOPA haveÌýÌýa joint paper making two proposals to help reduce the natural catastrophe protection gap. This comes from the fact that in the last three years, only a quarter of losses incurred from extreme weather events in the EU were insured, and the share of insurance protection is declining.
The first policy proposal is for an EU-wide public-private reinsurance scheme, aimed at increasing insurance coverage and diversifying risks across the EU. The second is for an EU fund for public disaster financing, improving disaster risk management across Member States.
Decisions on whether to accept either proposal need to be made at political level.
FSB framework for monitoring climate vulnerabilities
The FSB has set out aÌýÌýand toolkit for monitoring climate-related vulnerabilities in the global financial system. The report is aimed at FSB members and focuses on risks to financial stability, specifically emphasising the need to assess how physical and transition climate risks can be transmitted and amplified through credit, market and liquidity channels. The toolkit includes proxies, exposure metrics and risk metrics to provide early signals, gauge exposures and quantify impacts.
FSB report on the relevance of climate transition plans for financial stability
See ‘Reporting and disclosures�.
