The start of 2025 brought us both devasting wildfires in Los Angeles and news that 2024 was the warmest year on record, an average of 1.60°C above the pre-industrial era.¹ Indeed, 2024 saw extremes of weather on every continent—including heatwaves, floods, droughts, wildfires and tropical cyclones.² The physical risks of climate change are already here and growing. Whilst the US is currently rewinding some of its green energy efforts, the UK closed its last coal-fired power station on 30 September 2024³ and the UK government is still targeting 95% clean energy by 2030. The economy is transitioning, albeit recent political events make the pacing and multispeed pathway of transition more uncertain and almost certainly more uneven.

Climate-related—and broader sustainability-related—risks remain a real, material and ongoing key focus for insurers and the regulators.⁴ However, we believe that we are reaching a pivot point for the industry in approach and management of sustainability-related risks. New tools, techniques and paradigms are emerging that take a different perspective on sustainability-related risks and broader enterprise risk management. Rather than seek improvements solely through better data and models, this emerging perspective seeks to embrace the fundamental complexity and uncertainties of systemic risks. This is key to building robust understanding and resilient risk management.

This holistic approach means risk management efforts are not just aimed at a sustainability view, nor a business dimension or even a specific regulatory imperative. It is thinking of sustainability across the whole of enterprise risk management and asking how do we achieve better Ability, better Agility and better Alignment?

The 2025 sustainability agenda can be seen through these three pivots: starting with a top item for each and then seven broader agenda items. Individually every insurer’s needs will vary, but these agenda items will be relevant to everyone, with leading insurers engaging with them all.

2025 sustainability agenda’s top three

1. Ability—next-generation climate scenario thinking: The PRA’s 2025 ‘Dear CEO’ letter once again states that ‘further progress is required particularly on [climate] scenario analysis and risk management.’ During 2024, there has been greater awareness of macroeconomic impacts,⁵ biodiversity,⁶ physical risks and tipping points,⁷ as well as the uncertainties and potential stresses in the tail risks.⁸ There is a need to develop decision-useful scenarios that embrace these complexities and interactions.
2. Agility—developing tools and techniques for radical uncertainty: The transition to a low-carbon, nature-positive economy means that the future economy—and its risk dynamics—will be different. Therefore, a key risk management tool is developing agile resilience. Risk tools based on backward-looking, historical calibrations cannot capture these dynamics, nor the transitionary influences, and therefore cannot help organisations prepare for them. New tools and techniques, and the smarter use of scenario analysis including digital twins,⁹ can help explore and ‘pre-mortem’ different outcomes and identify what can be done now to build resilience. The gaps between modellers and executives needs to be closed for greater first-line awareness of potential false signals with more readiness to investigate and adapt.
3. Alignment—internal climate (and biodiversity) risk governance: The consultation on updates to SS3/19 (guidance on managing climate-related risks) is due shortly.¹⁰ Whilst its contents are not yet clear, the PRA’s 2025 priorities letter indicates that further progress is needed on climate risk management and scenario analysis. The June 2024 Institute and Faculty of Actuaries’ climate scenario risk alert¹¹ provided a good governance practice reminder on climate-related risks which can be used as a standard for insurers’ board communications as well as internal and external communications. There is also a growing awareness and focus on biodiversity risks. The SS3/19 update consultation could also provide the PRA an opportunity to more formally include biodiversity and broader sustainability risk within this framework without being overly prescriptive on metrics.

Next in line: 2025 sustainability priorities

Sustainability is an increasingly broad area—climate, nature and social inclusion are three core themes underpinning the United Nations’ 17 Sustainable Development Goals.¹² Whilst climate was an initial and ongoing area of focus for the finance industry, it’s increasingly reaching into nature and social aspects. There are seven further sustainability agenda items that are key focus areas for 2025. Leading insurers may try to make progress in each of them, and nearly all insurers will want to make progress on one or more in addition to the top three above.

Improving your abilities: becoming more skilful

4. Getting to grips with liability impacts: Whilst near-term climate impacts on UK mortality and morbidity are expected to be modest, they are very unequal. Thus the net impact on insurers will depend on their products and customer profiles. A recent Actuview panel discussion, in which Milliman chaired and participated, highlighted the depth of considerations needed to understand mortality and morbidity liability impacts, including macroeconomic effects.¹³
5. Biodiversity and nature-related risks: The climate crisis is twinned with a biodiversity crisis.¹⁴ The recent Green Finance Institute paper on materiality of nature-related financial risks for the UK¹⁵ highlighted that biodiversity risks to the UK over the next 10 years were equal or greater than climate-related risk. Across financial services, efforts are progressing with the Taskforce on Nature-related Financial Disclosures¹⁶ and an array of industry initiatives such as the Finance for Biodiversity Foundation.¹⁷ Biodiversity is integral to a successful climate transition and is becoming increasingly explicit in climate-related risk tools and transition plans.
6. Being just, social and inclusive: The new UK government is continuing its focus on engaging the insurance and savings industry on investment into the UK economy.¹⁸ The Association of British Insurers (ABI) reports that the 11 signatories of the 2023 Mansion House Compact currently invest £793 million of default defined contribution funds in unlisted equities with an ambition to get to 5% (over £40 billion) by 2030.¹⁹ On a broader basis, there is also a growing recognition of the need to consider ‘just transition’ pathways²⁰ and the need to mitigate the inequalities that climate change will otherwise create.²¹ The social dimension of future transitions has implications for investment risks and investment stewardship. A societal lens can also help identify potential investment opportunities that support social aspects and a just transition. Greater financial disclosures are also likely in future years as the Taskforce on Inequality and Social-related Financial Disclosures²² develops.
7. Artificial intelligence (AI) as a sustainability risk and opportunity: AI is an emerging risk and business opportunity in its own right—but it also intersects with sustainability issues. AI efficiency and operational gains have sustainability applications especially in reporting and managing data. For example, AI reporting tools can support reporting efforts, freeing up sustainability team time and resources. However, there are business risks, such as privacy, cyber-security and accuracy, as well as broader issues on fairness and access. AI also brings sustainability business opportunities—in particular improved customer servicing and strategies for cost-effective financial inclusion.

Improving your agility: becoming more responsive

8. Gap analysis: Sustainability is a rapidly evolving and developing field where many insurers have already made substantial efforts. But as such, a key priority is to take stock of current efforts, compare relative to peers and best practice (which is ever-evolving), identify any unintended gaps, and prioritise actions and next steps.

Improving your alignment: as regulators require and as you desire

9. Consumer duty: fairness and greenwashing²³: The FCA has an ongoing focus on Consumer Duty²⁴ and has committed to ongoing review and development of FG24/3: Finalised non-handbook guidance on the anti-greenwashing rule,²⁵ which came into force on 31 May 2024. The effort to ensure compliance with these requirements is likely to continue growing as disclosure requirements and expectations increase (eg, under the FCA’s Sustainability Disclosure Requirements²⁶). Underlying these disclosure requirements is the desire for transparency and fairness. These are core principles amongst the sustainability community where there is existing work on equality and fairness that can help guide and test organisations' disclosure efforts. Additionally, adopting a societal lens can help identify potential new business opportunities from greater inclusion.
10. Assuring your reputation: Reputation may be within an insurer’s top three sustainability risks. It can arise from unintentional greenwashing or discovering actions or investments that go against your brand or values. It can also arise from perception alone due to no fault of your own. One of the challenges is that there is no ‘perfect’ answer—the real world is messy with a need to allow some harms to create a ‘net good.’²⁷ Understanding the potential reputational implications is a key part of risk management: first aligning your intentions with your efforts, then exploring potential unintended consequences through narratives—in particular those that can cascade against you—and finally developing potential mitigations and ‘pre-morteming’ responses to prepare for situations where outcomes have still moved against you.

As ever, there are many emerging and evolving elements of sustainability risk management. Sustainability teams are often stretched, and there are risks of both fatigue and overwhelm. As a first step it is important to recognise and celebrate the progress that has been made—our industry approaches are transformationally different to those we were undertaking ten or even five years ago. Having recognised the progress, we should then take a step back. Examine the key gaps in the current approach and where needs are the greatest to keep moving forward. Resilience emerges from the combination of ability, agility and alignment. It results from the skills to understand, the flexibility and speed to adapt, and alignment with regulations and your business to sustain. There is always a need to prioritise—but that also means there is an opportunity to do more or do differently, as soon as those first priorities are met!

---

¹ Copernicus Climate Change Service. (10 January 2025). Copernicus: 2024 is the first year to exceed 1.5°C above pre-industrial level. Retrieved 30 January 2025 from https://climate.copernicus.eu/copernicus-2024-first-year-exceed-15degc-above-pre-industrial-level.

² World Weather Attribution. (27 December 2024). When Risks Become Reality: Extreme Weather In 2024. Retrieved 30 January 2025 from https://www.worldweatherattribution.org/when-risks-become-reality-extreme-weather-in-2024.

³ UK's last coal-fired power station set to close. (27 September 2024). BBC News. Retrieved 30 January 2025 from https://www.bbc.co.uk/news/articles/ckgn4gg5y2yo.

⁴ Eg Bank of England PRA. (9 January 2025). “Dear CEO” letter. Retrieved 30 January 2025 from https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2025/insurance-supervision-2025-priorities and Crowson, J., McGrenra, G., & Mittal, A. (7 January 2025). EIOPA consultations and the Solvency II review. Retrieved 30 January 2025 from https://www.milliman.com/en/insight/eiopa-consultations-solvency-ii-review-2.

⁵ The rise and fall: Climate change and inflation modelling. (9 January 2025). The Actuary. Retrieved 30 January 2025 from https://www.theactuary.com/2025/01/09/rise-and-fall-climate-change-and-inflation-modelling.

⁶ Green Finance Institute. (April 2024). Assessing the Materiality of Nature-Related Financial Risks for the UK. Retrieved 30 January 2025 from https://hive.greenfinanceinstitute.com/gfihive/assessing-the-materiality-of-nature-related-financial-risks-for-the-uk.

⁷ IPPR. (9 October 2024). The security blind spot: Cascading climate impacts and tipping points threaten national security. Retrieved 30 January 2025 from https://www.ippr.org/articles/security-blind-spot.

⁸ Institute and Faculty of Actuaries. (14 March 2024). Climate Scorpion—the sting is in the tail. Retrieved 30 January 2025 from https://actuaries.org.uk/news-and-media-releases/news-articles/2024/mar/14-mar-24-climate-scorpion-the-sting-is-in-the-tail.

⁹ A digital twin is a virtual model designed to accurately reflect the behaviour of the insurance office, market or real-life aspect (‘twin’) that is under investigation.

¹⁰ Bank of England PRA. (9 January 2025). “Dear CEO” letter. Retrieved 30 January 2025 from https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2025/insurance-supervision-2025-priorities.

¹¹ Institute and Faculty of Actuaries. (6 June 2024). Risk Alert. Retrieved 30 January 2025 from https://actuaries.org.uk/media/ue4hdq3l/risk-alert-climate-change-scenario-analysis.pdf.

¹² Department of Economic and Social Affairs, United Nations. The 17 Goals. Retrieved 30 January 2025 from https://sdgs.un.org/goals.

¹³ Spencer, N., & Howell, C. (21 January 2025). Beware ‘net-zero’ mortality and morbidity! Retrieved 30 January 2025 from https://www.milliman.com/en/insight/beware-net-zero-mortality-and-morbidity.

¹⁴ Spencer, N. (22 February 2024). Primer on biodiversity and nature-related risks, opportunities and regulation for those working in financial institutions. https://www.milliman.com/en/insight/biodiversity-nature-related-risks-opportunities-regulation-financial-institutions.

¹⁵ Green Finance Institute. (April 2024). Assessing the Materiality of Nature-Related Financial Risks for the UK. Retrieved 30 January 2025 from https://hive.greenfinanceinstitute.com/gfihive/assessing-the-materiality-of-nature-related-financial-risks-for-the-uk.

¹⁶ Taskforce on Nature-related Financial Disclosures (TNFD). Retrieved 30 January 2025 from https://tnfd.global.

¹⁷ Finance for Biodiversity Foundation. Retrieved 30 January 2025 from https://www.financeforbiodiversity.org.

¹⁸ Reeves, R. (14 November 2024). Mansion House 2024 speech. https://www.gov.uk/government/speeches/mansion-house-2024-speech.

¹⁹ ABI. (2024). The Mansion House Compact: Year one progress update. Retrieved 30 January 2025 from https://www.abi.org.uk/globalassets/files/publications/public/lts/2024/abi-mansion-house-compact.pdf.

²⁰ Just Transition Finance Lab. Retrieved 30 January 2025 from https://justtransitionfinance.org.

²¹ Spencer, N. (3 October 2024). Introducing climate inequality and justice to actuaries, Retrieved 30 January 2025 from https://www.milliman.com/en/insight/introducing-climate-inequality-and-justice-to-actuaries.

²² Taskforce on Inequality and Social-related Financial Disclosures (TISFD). Retrieved 30 January 2025 from https://www.tisfd.org/.

²³ Spencer, N., & Howell, C. (17 January 2025). Greenwashing and climate transition plans. Retrieved 31 January 2025 from https://www.milliman.com/en/insight/greenwashing-and-climate-transition-plans.

²⁴ Financial Conduct Authority. (12 September 2024). Our Consumer Duty focus areas. Retrieved 31 January 2025 from https://www.fca.org.uk/publications/corporate-documents/our-consumer-duty-focus-areas#:~:text=We%20have%20prioritised%20initiatives%20where,or%20urgency%20of%20that%20harm.

²⁵ Financial Conduct Authority. (23 April 2024). FG24/3: Finalised non-handbook guidance on the anti-greenwashing rule. Retrieved 31 January 2025 from https://www.fca.org.uk/publications/finalised-guidance/fg24-3-finalised-non-handbook-guidance-anti-greenwashing-rule.

²⁶ Financial Conduct Authority. (12 June 2024). Sustainability disclosure and labelling regime. Retrieved 31 January 2025 from https://www.fca.org.uk/firms/climate-change-and-sustainable-finance/sustainability-disclosure-and-labelling-regime.

²⁷ LGT Wealth Management. (3 October 2023). Sustainability: Commodities and the energy transition. Retrieved 31 January 2025 from: https://www.lgtwm.com/uk-en/insights/sustainability/commodities-and-the-energy-transition-174634.