Bridging the Gap: Aligning Insurance Portfolios with Sustainable Outcomes 

Insurers must navigate a complex environment where regulatory expectations are tightening, investor and client demands for responsible practices are growing, and the physical and transition risks associated with climate change are becoming more pronounced. Successfully bridging this gap is critical not only for managing risk but also for capitalising on emerging opportunities that support a sustainable future

Recognising the importance of this challenge, Mercer are pleased to support Insurers For Purpose in producing a report on sustainability integration within the insurance sector. The report draws on in-depth interviews with a diverse range of insurers, including Mercer’s own insurer clients, providing insights into the ongoing journey insurers are undertaking to embed sustainability into both their investment and underwriting frameworks. The findings underscore the complexity of this in the current market environment and highlight key themes that resonate strongly with the conversations Mercer is having with our wider asset owner clients globally.

From our client engagements and practical experience, we have identified three primary challenges that insurers are currently grappling with as they strive to align with sustainable outcomes:

One of the challenges insurers face is the quantification of climate risk within their Own Risk and Solvency Assessments (ORSAs). This process is critical for understanding the potential impacts of climate change on both sides of the balance sheet. The Prudential Regulation Authority’s (PRA) Consultation paper 10/25 further emphasises the need for firms to embed climate risk considerations explicitly within their investment strategies. To support insurers in meeting these expectations, Mercer has developed robust methodologies including climate scenario analysis, which enables asset owners to understand potential future climate pathways and their financial implications. Additionally, we assist insurers in setting clear, actionable climate-related targets and crafting transition plans that align with regulatory guidance and best practices, thereby helping to enhance their investment portfolio resilience and strategic positioning.

The investment landscape for climate-related strategies is both complex and rapidly evolving. Insurers must carefully evaluate how physical risks—such as extreme weather events and long-term environmental changes—impact their liabilities and how targeted investments can serve as effective hedges against these risks. This requires a nuanced understanding of the interplay between liability exposures and climate adaptation opportunities within the investment universe. Mercer’s Transition Pathway solution is designed to help clients navigate this complexity by identifying and assessing investment opportunities that not only seek to mitigate physical risks but can also contribute to a broader transition to a low-carbon economy. By leveraging such frameworks, insurers can better align their asset allocations with the evolving risk profile of their liabilities, enhancing both financial and sustainability outcomes.

A growing number of insurers are moving beyond risk mitigation to proactively setting dedicated impact objectives within their investment portfolios. This shift reflects a broader recognition of the role insurers can play in driving positive societal and environmental change. However, establishing these impact objectives requires clarity and measurability to ensure that investments deliver tangible benefits. It is equally important to evaluate the expected financial returns alongside the societal and environmental impacts, as insurers must balance fiduciary responsibilities with their sustainability ambitions. Mercer supports clients in defining these objectives, helping with investment implementation and in developing frameworks to measure and report on impact, enabling informed decision-making and transparent communication with stakeholders.

Overall, the insurance industry has made progress to incorporate sustainability criteria into investment decision-making processes. However, this remains an ongoing journey with several critical areas still requiring focused attention. Policy objectives need to be clearly articulated and aligned with broader corporate strategies. Risk measurement techniques must continue to evolve to capture the full spectrum of climate-related risks, including their integration with underwriting risk frameworks. As insurers deepen their understanding and capabilities in these areas, they will be better positioned to manage emerging risks and seize opportunities within their investment portfolios that contribute to a sustainable future.

Mercer remains committed to partnering with insurers on this transformative path, providing the expertise, tools, and insights necessary to bridge the gap between current practices and sustainable outcomes. Together with initiatives like Insurers for Purpose, we aim to support the insurance industry in building resilient, responsible portfolios that meet the demands of today and the challenges of tomorrow.