In December 2025, the Prudential Regulation Authority raised the bar. Supervisory Statement SS5/25 moved climate risk out of the “awareness” phase and into core financial workflows: governance, credit underwriting, capital planning, provisioning. Building on SS3/19, the PRA has introduced SS5/25, establishing the expectation for firms to integrate climate risk into core financial workflows using climate scenario analysis and climate data.
Banks now have a deadline attached to a question they’ve been able to defer for years: how good is the data behind your SME portfolio’s climate risk numbers, really?
This isn’t an ESG story anymore. It’s a capital adequacy story.
From Awareness to Evidence
Regulators are looking for climate risk analysis that is practical, explainable and proportionate to a firm’s size and material exposures: perfection isn’t the requirement, explainability is. That single word, explainability, is where SME portfolios become a problem.
Large listed corporates publish audited emissions and transition disclosures. SME borrowers, typically the bulk of a commercial bank’s client base by volume, mostly don’t publish anything comparable. Banks fill the gap with sector-average proxies, and under SS5/25, a proxy is no longer a silent workaround.
Where estimates or proxies are used, firms must be prepared to justify and defend them, and engagement across the data chain is expected to help close material data gaps. A sector average applied to a mid-sized manufacturer with no company-specific evidence behind it is exactly the kind of assumption a supervisor will now ask you to defend.
Granularity Is Becoming a Risk-Weighting Input
The practical effect is that data granularity is starting to feed directly into how exposures get priced, provisioned and capitalised:
- Portfolio-level climate risk models are only as defensible as the company-level data feeding them
- Firms must address data gaps, ensure the reliability of proxies and external data, and provide transparent climate-risk disclosures aligned with supervisory expectations
- Banks relying on modelled, sector-wide estimates for the majority of their SME book carry a growing supervisory exposure of their own
This is the Data Gap TDH talks about, not an absence of SME sustainability information, but information that exists in fragmented, non-standardised form across websites, filings and disclosures, uncollected and unverified at scale.
What This Means for Banking Portfolios
The Climate Action platform, developed and deployed by NatWest and National Australia Bank, built on TDH’s sustainability intelligence and powered by FourTwoThree, exists for exactly this shift. It standardises SME transition data at book level and gives relationship teams portfolio heatmapping built on a company’s own reported evidence, not a sector-wide stand-in.
For relationship managers, the commercial upside isn’t a pitch about energy bills, it’s the ability to offer preferential lending terms to SME clients who can evidence stronger transition data, backed by a defensible, auditable data trail behind every exposure.
Talk to Our Team
If your SME book still runs on modelled proxies, June 2026 is closer than it looks. Get in touch to see how the Climate Action platform brings company-level evidence into your portfolio view.
