The start of 2025 brought us news of both devasting wildfires in LA and of 2024 being the warmest year on record, an average of 1.60°C above the pre-industrial era.¹ 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 European Union remains on course for the European Green Deal objectives,³ even though proposed changes were recently published by the European Commission to simplify and significantly reduce the scope of the Corporate Sustainability Reporting Directive (CSRD) and other European sustainability directives.⁴ The global economy is transitioning, albeit that 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 real, material and an ongoing key focus for insurers and the regulators.⁵ 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.

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: During 2024, there has been greater awareness of macroeconomic impacts,⁶ biodiversity,⁷ physical risks and tipping points⁸ as well as the uncertainties and potential stresses in the tail risks.⁹ European insurers are required to carry out scenario analysis for material climate risk exposures in their Own Risk and Solvency Assessment (ORSA), including consideration of at least two long-term climate changes scenarios: one where the global temperature increase remains below 2 degrees Celsius and another where it is significantly higher than 2 degrees Celsius. When defining scenarios, it is important to consider decision-useful scenarios that embrace these complexities and interactions, in addition to leveraging the most up-to-date climate science and the insights into macroeconomic impacts when developing scenario narratives.
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, the key risk management tool for this is to develop resilience. Risk tools based on backward-looking, historical calibrations cannot capture these dynamics nor the transitionary influences and, therefore, cannot support organisations to prepare for them. New tools and techniques and the smarter use of scenario analysis, including digital twins,¹⁰ 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: European regulators remain engaged on climate risk governance, with growing awareness and focus on biodiversity risks. In December 2024, the European Insurance and Occupational Pensions Authority (EIOPA) published consultation papers as part of the Solvency II (SII) review on sustainability risk management and biodiversity risk management for insurers.¹¹ One of the key elements of the consultation papers was alignment of internal reporting and sustainability plans with external CSRD disclosures. The proposed changes to CSRD will create new uncertainty for insurers over the short term as many large insurers will be well advanced in the CSRD projects. However, alignment with external commitments will still be key from a reputational standpoint, regardless of any changes to the scope of CSRD disclosures.
   
   Click here to find out more on the proposed changes introduced by the SII review.

Next-in-line 2025 sustainability priorities

Sustainability is an increasingly broad area—climate, nature and social inclusion are three core themes underpinning the 17 United Nations’ 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.

From a European life and health insurer’s point of view, 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 previous.

Improving your abilities: Becoming more skilful

4. Getting to grips with liability impacts: Whilst near-term climate impacts on European mortality and morbidity are expected to be modest, they are very unequal, and thus the net impact on insurers will depend on their products and customer profiles. A recent Actuview panel discussion, chaired and participated in by Milliman, 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 EIOPA consultation paper on biodiversity risk management explores biodiversity risks relevance for insurers and how these risks can be considered within the risk management framework. Across financial services, efforts are progressing with the Taskforce for Nature-related Financial Disclosures¹⁵ and an array of industry initiatives, such as Finance for Biodiversity.¹⁶ 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: There is a growing recognition of the need to consider ‘just transition’ pathways and the need to mitigate the inequalities that climate change will otherwise create.¹⁸ 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 for Inequality and Social-related Financial Disclosures¹⁹ develops.
7. 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. Whilst 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 greenwashing: With increasing measures in place to combat climate change, progress is made towards net zero. However, it brings an increasing risk of greenwashing. EIOPA published a Final Report and Opinion on Greenwashing²⁰ on 31 May 2024 in an effort to combat the risk of greenwashing. The effort to ensure compliance with these greenwashing requirements is likely to continue growing as disclosure requirements develop (e.g., under the CSRD) or consumer preferences shift towards greener products and investments. 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. There is already evidence of increased consumer demand for sustainable insurance and investments in some European countries. As new products and solutions are developed to meet consumer demand, discussions around consumer fairness, value for money and greenwashing will come more to the fore.
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 an insurer’s 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.’²¹ 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. It will also be important to ensure alignment between external messaging and public disclosures and commitments with internal sustainability plans.

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 10 or even five years ago. Having recognised the progress, we should then take a step back and examine what are 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 the 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 European Centre for Medium-Range Weather Forecasts (ECMWF). (10 January 2025). Copernicus: 2024 is the first year to exceed 1.5°C above pre-industrial level [Press release]. Retrieved 6 March 2025 from https://climate.copernicus.eu/copernicus-2024-first-year-exceed-15degc-above-pre-industrial-level.

² Barnes, C., Clarke, B., Giguere, J., Kew, S., Merz, N., Otto, F., Philip, S., et al. (27 December 2024). When Risks Become Reality: Extreme Weather In 2024. World Weather Attribution. Retrieved 6 March 2025 from https://www.worldweatherattribution.org/when-risks-become-reality-extreme-weather-in-2024/.

³ The European Commission’s European Green Deal objectives are available at https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en.

⁴ European Commission. (25 February 2025). Commission simplifies rules on sustainability and EU investments, delivering over €6 billion in administrative relief [Press release]. Retrieved 6 March 2025 from https://ec.europa.eu/commission/presscorner/detail/en/ip_25_614.

⁵ Crowson, J., McGrenra, G. & Mittal, A. (7 January 2025). EIOPA consultations and the Solvency II review: 2024 consultation papers: Part 2. Milliman Briefing Note. Retrieved 7 March 2025 from https://www.milliman.com/en/insight/eiopa-consultations-solvency-ii-review-2.

⁶ Two papers from our 2024 research are available at https://www.theactuary.com/2025/01/09/rise-and-fall-climate-change-and-inflation-modelling and https://www.milliman.com/en/insight/long-term-inflation-structural-drivers-scenario-modelling.

⁷ EIOPA (4 December 2024). Consultation on a report on biodiversity risk management by insurers. Retrieved 6 March 2025 from https://www.eiopa.europa.eu/consultations/consultation-report-biodiversity-risk-management-insurers-solvency-ii-review_en.

⁸ Aksenov, Y., Laybourn, L., Milkoreit, M. & Yamineva, Y. (18 September 2024). The UN Summit of the Future – An Opportunity to Address the Risks of Earth System Tipping Points. Global Tipping Points. Retrieved 6 March 2025 from https://global-tipping-points.org/news/the-un-summit-of-the-future-an-opportunity-to-address-the-risks-of-earth-system-tipping-points/.

⁹ Abrams, J.F., Bedenham, G., Bettis, O., Kemp, L., Lenton, T.M., Saye, L. & Trust, S. Climate Scorpion – the sting is in the tail. Institute and Faculty of Actuaries. Retrieved 6 March 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/.

¹⁰ 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.

¹¹ EIOPA (4 December 2024). Consultation on a report on biodiversity risk management by insurers, op cit.

¹² The United Nations’ Sustainable Development Goals are available at https://sdgs.un.org/goals .

¹³ Howell, C. & Spencer, N. (21 January 2025). Beware ‘net-zero’ mortality and morbidity! Milliman White Paper. Retrieved 6 March 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. Milliman White Paper. Retrieved 6 March 2025 from https://www.milliman.com/en/insight/biodiversity-nature-related-risks-opportunities-regulation-financial-institutions.

¹⁵ The Taskforce on Nature-related Financial Disclosures’ recommendations and guidance are available at https://tnfd.global/.

¹⁶ Information on the Finance for Biodiversity Foundation is available at https://www.financeforbiodiversity.org/.

¹⁷ Information on the Just Transition Finance Lab is available at https://justtransitionfinance.org/.

¹⁸ Spencer, N. (3 October 2024). Introducing climate inequality and justice to actuaries. Milliman White Paper. Retrieved 6 March 2025 from https://www.milliman.com/en/insight/introducing-climate-inequality-and-justice-to-actuaries.

¹⁹ More information on the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) is available at https://www.tisfd.org/.

²⁰ EIOPA. (31 May 2024). EIOPA's Final Report and Opinion on Greenwashing - Advice to the European Commission. Retrieved 6 March 2025 from https://www.eiopa.europa.eu/publications/eiopas-final-report-and-opinion-greenwashing-advice-european-commission_en.

²¹ Kelly, J. (6 October 2023). Sustainability: Commodities and the energy transition. LGT Wealth Management. Retrieved 7 March 2025 from https://www.lgtwm.com/uk-en/insights/sustainability/commodities-and-the-energy-transition-174634.