The new year usually brings hope, but as we begin 2025 it’s hard to feel optimistic about climate change. The target to keep temperature rise below 1.5 degrees Celsius is in jeopardy, with less than five years of current emissions left before we hit our carbon limit. Last year was the hottest on record, and for the fifth consecutive year insured losses from natural disasters surpassed $100 billion. We might be nearing critical tipping points, like the collapse of the Atlantic Meridional Overturning Circulation (AMOC) and the Amazon rainforest dieback, which could lead to rapid and irreversible changes in Earth’s systems.
Despite increasing disasters and looming crises, action remains limited. Current government policies are likely to result in about 3 degrees Celsius of warming by the century’s end, and corporate leadership is wavering as many prominent companies have adjusted their 2030 targets and relaxed their transition plans. There is hope that climate ambition will resurface this year as governments prepare new 2035 targets ahead of COP30 in Brazil, but this “ambition moment” may be hindered by the United States’ anticipated exit from the Paris Agreement.
This is not to overlook significant advancements in key technologies like wind and solar, which are growing rapidly and making up most of the new energy added to grids worldwide. However, we must be realistic. Global emissions are still rising. Climate breakdown and a chaotic transition are real risks that insurers face through their underwriting and investments — at the time of writing, some estimates place the 2025 California wildfires as the largest insured wildfire losses in history.
If the next few years are to be characterized by a dialing-down of the focus on climate change mitigation, then we must see a counterbalancing increase in attention on adaptation and resilience. And no other industry has a more crucial role in helping societies and businesses adapt to climate change and the transition to net zero than insurance.
With this in mind, here are 10 sustainability priorities for insurers in 2025.
1. Rethink your approach to climate scenario analysis
As risks increase, the insurance industry can expect more regulatory scrutiny. For example, the European Insurance and Occupational Pensions Authority’s (EIOPA) has proposed higher capital charges for fossil fuel investments.
Insurers should stress test their balance sheets and business plans against various scenarios, including regulatory changes, to identify major risks and opportunities. Many insurers still treat scenario analysis as a compliance task rather than a strategic tool, unlike many banks and investors, which use it to guide lending and investment decisions. Key areas to explore include how emissions-reduction commitments affect business under different transition scenarios and how various strategies perform under different policy conditions.
As climate change accelerates and transition risks grow, insurers must focus on immediate dangers and be ready to adapt to new guidance on short-term scenarios. They should also question the effectiveness of historically calibrated catastrophe models and their ability to accurately predict climate-related risks like floods and wildfires. Additionally, they need to start incorporating tipping points into their scenario analysis — ignoring these is no longer tenable given their increased likelihood and potential impact.
2. Strengthen climate governance
This outlook has significant implications for corporate governance. Boards must dedicate more time to overseeing new processes like scenario analysis and transition planning, reviewing mandatory disclosures, and evaluating emissions reduction targets and related performance indicators for executives. The stakes are high, as poorly defined targets can lead to reputational damage and greenwashing risks.
Boards are looking for guidance on managing their responsibilities and are aware of the conflicting demands from activist investors from all sides. This also places increasing demands on sustainability teams to ensure boards receive the documentation and analysis needed, requiring them to work with group functions and business units to synthesize and analyze data and drive convergence on policy and strategy.
3. Approach transition plans as a strategic planning exercise
In just a few years, the role of climate transition plans has evolved. What began as a framework for insurers to meet net zero commitments has turned into another mandatory disclosure. Hopefully this does not result in a box-ticking approach to what should instead be a strategic planning exercise, albeit one that sets out the company’s articulation of the role it intends to play in delivering the net-zero transition, how it will be defining and measuring success, and the specific actions it will take to get there.
It’s crucial to clarify the narrative from the start. Before diving into detailed disclosures or planning, ask, “What story do I want to tell to motivate the right actions?” and identify the primary audience. This can guide all subsequent work. While measured emissions may be part of the narrative, they are not necessarily the best indicators of real-world impact or business action for insurers. The focus should rather be on how insurers underwrite, manage claims, and invest to support the climate transition.
Given the uncertain outlook, insurers must be ready to adapt their transition plans to changing circumstances. This means understanding how the success of their plans depends on external factors like policy and regulation, as well as broader decarbonization progress. Insurers should develop and monitor leading transition indicators to track their actions and those of governments, companies, and societies. Monitoring these indicators can help inform decisions and adjustments to plans as needed. Leading insurers will also start to incorporate nature considerations into their transition plans, following forthcoming guidance from relevant organizations.
4. Build a name-level transition assessment capability
As uncertainty about the transition increases and the challenge of meeting decarbonization targets grows, the ability to assess companies’ transition plans becomes more critical. Climate transition plan assessment tools offer a more comprehensive view of companies’ transition prospects and real-world emissions reduction opportunities than just looking at financed emissions or insurance-related emissions. This is another area where insurers can learn from the experience of the banking industry, where these approaches are now widely used.
5. Develop new offerings to support adaptation and resilience
Arguably, property and casualty (P&C) insurers’ primary adaptation role is to address the financial consequences of mounting climate impacts. However, cash alone cannot fully cover the losses incurred. For example, studies show that up to 40% of small businesses close permanently after flooding, often due to prolonged downtime rather than a lack of insurance. Meanwhile, demand for adaptation services is rising among business customers.
To maximize the value of their propositions, insurers should move beyond a product-focused approach and develop comprehensive services that include advisory, data analytics, and digital solutions, while forming partnerships with banks, engineering firms, and data providers as needed. One such example of innovation is SentriskTM, developed by Oliver Wyman and Marsh, which uses artificial intelligence (AI), big data, and geospatial intelligence to map supply chains and identify critical vulnerabilities and disruption risks. We are now using this with corporate clients to develop resilience strategies and design sophisticated supply chain risk transfer programs.
The Lancet has identified climate change as the greatest global health threat of the 21st century, placing life and health insurers also on the front lines. They can support adaptation with tailored health and protection products for vulnerable populations, such as those at risk from extreme temperatures, and expand coverage to help societies adapt to changing disease patterns and mental health challenges.
6. De-risking transition finance and creating a ‘deal-team for the planet’
There is a significant global financing gap for achieving net zero, amounting to trillions of dollars annually. Insurance can help close this gap by finding new ways to engage throughout the project lifecycle. Our analysis for the Sustainable Markets Initiative’s (SMI) Insurance Task Force revealed a disconnect between where insurance typically operates in clean technology projects and where the main risks for developers and lenders lie. Insurers are more comfortable covering operating risks for infrastructure, while the biggest concerns arise earlier in the project lifecycle, such as uncertainties in business plans due to counterparty, regulatory, and demand risks. There is undoubtedly more opportunity for innovative insurers to get involved earlier in the project lifecycle and catalyse transition finance.
So, while climate change presents major risks for insurers, especially in the real economy, it also creates opportunities for those willing to take action. Specialist insurers who take the lead in insuring new technologies will benefit as the economy transforms, whether that is evolving new solutions, developing targeted offerings or partnering to offer education and support to customers. While the movement to these new technologies has not yet gathered full pace, when the herd moves, it is likely to be quick. Those who can help customers, investees, and suppliers navigate rapid change will boost reputations and deepen relationships.
7. Seize the nature opportunity
Protecting and restoring nature is crucial for the long-term interests of the insurance industry. Natural infrastructure can mitigate disaster risks, support adaptation, and provide significant health benefits. Leading insurers are already creating new products to protect ecosystems and reduce risks associated with nature-based solutions. On the investment side, natural capital is growing as an asset class, and new instruments like biodiversity bonds and blue bonds are emerging.
However, insurers must proceed with caution. The nature agenda is broader and more complex than climate change and insurers need to determine their focus. Leading insurers are defining their niche, such as oceans or the circular economy, and integrating this into their business through underwriting, claims management, investment criteria, and product development.
8. What policyholders want (and how to give it to them)
One of the most critical questions we face with life insurers is “What do our policyholders want from us when it comes to sustainability?” Will they be willing to accept lower returns, at least temporarily, to support greener initiatives? Unfortunately, customer surveys often provide limited insights and can be biased. So how should we integrate environmental, social, and governance (ESG) concerns into our asset allocations?
Currently, there is no clear guidance, but many insurers are trying to better understand the trade-offs between risk and return while making asset allocations in their core products as sustainable as possible. This might still be accompanied by more specialist ESG-focused products with clearer disclosures, but being clear that the risk-return profile could differ in the short term. Either way, it's crucial to build the specialist investment expertise so that any performance gap is offset by better-targeted investments.
There is a notable gap between the funding required for climate transition and what is currently available. This gap presents significant opportunities, especially for long-term, less liquid investments, which are also increasingly reflected in governments’ industrial policies. Many of these investments make sense, whether labeled as ESG or not, but they require specialized skills, including knowledge of blended finance protocols and various funding and tax incentives.
9. Crunch time for disclosure and reporting
As the first set of mandatory disclosures within the Corporate Sustainability Reporting Directive (CSRD) are published this year, and with an increasing number of non-European Union (EU) countries adopting International Sustainability Standards Board (ISSB) reporting, it is easy to become overwhelmed by the details of the disclosure requirements and end up with a “just-in-case” approach to materiality and reporting. This is exacerbated by the fact that many disclosure rules and guidelines are primarily designed for real-economy businesses rather than for financial services and insurance.
So, it’s important to take a step back and concentrate on the purpose of disclosures, which is to provide useful information for decision-making to key external stakeholders. In practice, this may mean differentiating between what is “important” and what is “material” during the double materiality assessment, and focusing on delivering better information across fewer material subject areas. Although producing a lengthy report may satisfy auditors, it is likely to be a document that few others will read, so it is preferable to prioritize quality over quantity, while also ensuring that your double materiality methodology and results are reasonable in comparison to peers.
10. Update your approach to ESG risk management
Insurers are rapidly changing their strategies and commitments regarding ESG factors, but many have not updated their risk management frameworks accordingly. While ESG can usually be seen as part of broader risk factors, the increasing focus on it, the speed of change, and the uncertainty about impacts mean insurers should think about creating a specific approach and possibly a formal policy for managing ESG risks.
There are chances to improve and formalize how ESG risks are managed in various parts of the risk management framework, such as:
The risk operating model
Which should clarify responsibilities across the three Lines of Defense.
Risk appetite
Which should recognize ESG risk as a key factor and ensure it is included in how appetite is expressed and how exposure is measured against that appetite.
Risk indicators, triggers, and limits
Which involves developing and testing clear exclusions for high-risk exposures, ensuring ESG risks are included when setting exposure and concentration limits, and creating specific ESG-related limits. For instance, there should be triggers and thresholds for situations where measurement technology is lacking to fully integrate ESG into standard risk types (like potential losses from climate scenarios). It is also essential to track progress against stated commitments and goals, identify possible causes of greenwashing, and assess regulatory compliance and financial risk exposures.
Risk identification and control
Which should include ESG stress testing and scenario analysis in long-term risk exposure reporting, especially evaluating how resilient the business strategy is to changes in environmental, social, and governance factors.
The path forward for insurers
It is clear that the climate and sustainability landscape for insurers has become increasingly complex over the last 12 months, and this trend is likely to continue in the near term. It is also clear that, for business leaders who take an active interest in their external environment, wanting to “do the right thing” in the face of economic political and social headwinds and competing interests is inadequate.
We firmly believe that climate change and wider environmental, social, and governance impacts both create commercial opportunities and pose risks to any insurer that they cannot afford to overlook. We also believe that a focus on all facets of sustainability is not just responsible, it is sound business practice. But this necessitates a more profound and nuanced understanding and approach than many external drivers of action — activists, regulators, and standard setters — might imply. Will 2025 be the year insurers reclaim their narrative and set their own course?
