UK insurers and pension funds trying to shape their approach to sustainability in their underwriting and investment portfolios face a potential regulatory blind spot, according to a new industry report.
This has emerged as one of the key challenges of the slow progress on creating a post-Brexit Solvency UK regime, writes Contributing Editor David Worsfold.
Insurers have a clear desire to the embed sustainability across investment, underwriting and risk frameworks but need greater clarity from regulators, as well as respite from the political push back from across the Atlantic.
Earlier this year the Prudential Regulation Authority (PRA) issued a consultation paper – CP10/25 – setting out its expectations around climate risk, reinforcing the industry’s need to demonstrate how insurers assess and address long-term risks linked to climate change. It moved the debate on from seeing sustainability as a matter of reputation and recognised it as a material financial and strategic issue, influencing investment decisions, underwriting practices and overall risk management.
The challenges that emerge from this strategic shift in emphasis are highlighted in Insurers for Purpose – Navigating sustainability integration across the insurance sector, a report by Pensions for Purpose commissioned by Federated Hermes, Fidelity International, Gresham House, Mercer, SAIL Investments and Solas Capital. It draws on 20 in-depth interviews across life, commercial, savings, mutual, reinsurance and annuity providers.
It concludes that Solvency UK is neutral between high and low-carbon assets. This creates a regulatory blind spot where capital requirements protect balance sheets but fail to differentiate between projects that accelerate the transition and those that lock in fossil fuels.
“Insurers seek clear, principles-based guidance from regulators, including clarity on fiduciary duty, incentives for transition investments, reduction of reporting burdens, actionable scenario insights and consistent benchmarking, all of which would help translate sustainability ambitions into effective investment practice, and support the investment case for sustainability-positive assets,” says the report.
It also highlights that although for most insurers climate and nature are now core prudential issues, they are shying away from the once popular ESG (Environmental, Social and Governance) labels, as this has been polticised by the supporters on the US adminsitraion. They now prefer to talk about supporting sustainability a core objective, as long as it aligns with the wider prudential objectives and the expectations of regulators and keepos them outof the political crosshairs.
Key findings
- Responsible investors, not yet impact investors: most insurers remain focused on screening and exclusions rather than actively investing for positive impact, although some exceptions are emerging.
- Leadership and regulation are key drivers: larger firms are advancing more quickly due to greater resources, but smaller organisations remain committed, despite capacity and compliance challenges.
- Terminology shift amid ESG backlash: UK insurers prefer terms like ‘responsible’, as some perceive ‘impact’ and ‘environmental, social and governance’ (ESG) have become politicised.
- Integrating underwriting and investment: firms are beginning to unify climate strategies across functions, though investment integration remains more advanced than underwriting.
- Climate leads the agenda: climate risk is managed through stress tests, reporting by the Task Force on Climate-related Financial Disclosures (TCFD), stewardship and targeted allocations to transition assets and Article 8/9 funds.
- A call for clarity and incentives: insurers seek principles-based regulatory guidance, including clearer fiduciary duties, incentives for transition investments, reduced reporting burdens and consistent benchmarking, to translate ambition into practice.
Commenting on the launch of the report, Bruna Bauer, Head of Impact Lens, Pensions for Purpose said: “Insurers play a central role in a resilient financial system. As risk managers, they have extensive experience integrating climate considerations into stress tests and risk registers. However, they are now seeking clearer guidance and stronger incentives to embed sustainability into their asset allocation, including nature-positive and transition assets. Their ask is clear: clarity on fiduciary duty, incentives for transition investments, reduction of reporting burdens, actionable scenario insights and consistent benchmarking.”