PRA climate consultation raises the stakes for law firms

The Bank of England’s Prudential Regulation Authority (PRA) closed its consultation on July 30, after it had initially opened on May 2, marking a significant regulatory shift in how UK insurers and banks must approach climate-related financial risk. Although the consultation window has ended, its implications are only just beginning. Regulators remain concerned that existing approaches are not delivering the depth of change required to safeguard the financial system against increasingly severe climate events. 

While insurers and banks were the consultation’s primary focus, the ripple effects will be deeply felt by the law firms that serve these industries—particularly those advising insurers. As the regulatory bar rises, insurers will expect their legal partners to demonstrate not just awareness but credible, operational climate risk policies of their own. In short, law firms must be ready to walk the talk—or risk being left behind. 

In his speech at the launch of the consultation earlier this year, the Bank of England’s prudential policy executive director, David Bailey, listed a number of recent weather disasters to illustrate the rise in climate-related events is a reality: the floods in Spain last October; the 2022 European heat wave; the flooding in Pakistan that decimated a third of the country with disastrous economic impacts; and the Californian wildfires just this January, costing hundreds of billions of dollars.  

He emphasised the need for banks and insurers to update their approach to climate-related risk management to ensure they can continue to support clients.  He explained that whilst firms are starting to develop, build and update risk management procedures around this, the approach taken by individual businesses is not consistent across the industry.  

The aim of this consultation, he said, is ‘to set out clear, straightforward and concise expectations about climate-related risk identification, management and governance outcomes that the PRA would like to see from firms’ – with significant knock-on impacts for the law firms that advise them.

What is in the PRA’s Climate Consultation?

In his speech at the launch, Bailey emphasised that the new standards proposed in the consultation document are ‘expectations’, not rules.  

They seek to set new principles for firms to follow, in appropriate proportion, leaving management to decide what actions make most sense for their particular business.  

He also emphasised that they are ‘enhancements’ to the PRA’s previous guidance, not a change of direction, updated to take account of lessons learned in the last five years as the industry’s ‘understanding of best practice has matured’; and designed to align the PRA’s approach with international standards for banks and insurers. 

The biggest change in approach set out in the consultation is a switch to forward-looking scenario planning, rather than risk management based on historical data. Firms will be required to use scenario analysis to inform their decision making, and then use their own judgement and risk appetite, ‘as they know their own businesses the best’. 

Running alongside this new emphasis on scenario planning is a new requirement that climate change risk management be cascaded ‘from the top down’, becoming the responsibility of the board and senior management, as part of core strategy, rather than treated as a stand-alone ESG issue.  Firms will also be required to have a formal risk appetite statement, against which to make their judgment calls. 

Knock-On Effects for Insurance Law Firms

For insurance law firms, these regulatory changes aren’t just academic - they mark a tangible increase in client expectations and compliance obligations. The logic is simple: if insurers are under pressure to evidence serious climate governance and risk controls, they will look closely at their partners and suppliers, including their law firms, to ensure alignment.

What does this mean in practice?

Due diligence on law firm practices may become routine. Insurers will want evidence of carbon footprint tracking, internal climate risk governance, and employee awareness training.

Tendering pressure will mount. Climate credentials could become a formal part of panel appointment processes or requests for proposals (RFPs).

Finally, credibility matters. Tick-box statements will no longer suffice. Clients will expect detailed, substantiated responses on how their legal advisers are addressing climate-related risks—both operationally and in their advice.

And the challenge is layered: law firms not only need to manage their own internal risks but also need to demonstrate that they can help clients navigate an increasingly complex regulatory environment. That means investing in climate literacy, building advisory capabilities, and ensuring their internal compliance is watertight.

The Wrong Way to Do This: Meaningless Compliance

Faced with rising compliance expectations, many firms may instinctively turn to templated ESG reports, recycled policy statements, or superficial carbon audits. But this approach risks turning a crucial regulatory shift into just another admin-heavy chore. Worse still, it could backfire with clients and regulators who are increasingly adept at spotting greenwash.

Tick-box compliance may meet the letter of new expectations, but it offers little in terms of insight or resilience. When climate change is considered a material financial risk - not just a reputational or CSR concern - lip service simply won’t do.

The PRA’s emphasis on strategy integration, board oversight, and scenario planning points to a deeper transformation: this is about changing how institutions think about long-term value and resilience. Law firms that grasp this - and respond in kind - will have a genuine edge.

The Smart Way to Do This: Turning Compliance Into Insight

It doesn’t have to be all pain. Done intelligently, this more burdensome compliance exercise can deliver long-term strategic value.

1. Start with board-level ownership. Treat climate risk as a core strategic issue, not a side project for marketing or ESG teams. This aligns with how the PRA expects insurers to act—and positions the firm as a serious partner.
2. Invest in scenario thinking. One of the core components of the consultation is better use of forward-looking risk analysis. Law firms can adapt this internally: what would different climate scenarios mean for client industries, litigation risk, professional indemnity exposure, or even their real estate footprint?
3. Create measurable, auditable systems. Track Scope 1, 2 and (where possible) Scope 3 emissions. Embed climate risk into internal risk registers and governance frameworks. Make it real.
4. Upskill your lawyers. Regulatory regimes around climate are evolving rapidly. Firms that can offer genuine advisory capability in climate-related financial disclosures, greenwashing litigation, or transition risk strategy will stand out.
5. Use data for business development. Climate risk profiles vary by client segment. Analysing your client base through this lens can identify at-risk sectors, new service lines, and opportunities for targeted outreach.

Conclusion: Don’t Get Left Behind

The PRA’s consultation is more than a regulatory update—it is a warning shot across the bows. As insurers and banks face higher expectations on climate risk management, their legal advisers must step up.

For insurance law firms, this means more than tweaking policies. It demands an integrated, serious approach to climate risk that reflects not just regulatory compliance but strategic foresight.