UK regulators have been urged to create a clear set of rules for sustainability as insurers look to embed sustainability across investment, underwriting and risk frameworks.

A new report by Pensions for Purpose, commissioned by Federated Hermes, Fidelity International, Gresham House, Mercer, SAIL Investments and Solas Capital has warned regulatory gaps are hindering the insurance sector’s efforts to drive sustainability.

The study, Insurers for Purpose – Navigating sustainability integration across the insurance sector, said the Prudential Regulation Authority (PRA)’s consultation paper CP10/25 exemplifies the growing regulatory expectations around climate risk, reinforcing the industry’s need to demonstrate how insurers assess and address long-term risks linked to climate change. It warned what was once a matter of reputation is now recognised as a material financial and strategic issue, influencing investment decisions, underwriting practices and overall risk management.

The report highlighted that leadership commitment, risk management and regulatory evolution have played decisive roles in embedding sustainability as a business priority. Boards and Chief Executive Officers (CEOs) are now directly engaged through sustainability committees and governance structures that integrate climate risk alongside financial risk.

Interviewees argued that while Solvency UK ensures prudence and stability, it is currently neutral between high and low-carbon assets.

In their view, this creates a regulatory blind spot, where capital requirements protect balance sheets, but fails 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.

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.”

The report’s key findings include:

• 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.

Doug Anderson, executive director – head of international consultant relations, Federated Hermes, added: “Insurers are increasingly incorporating sustainability goals into their investment strategies. Beyond exclusions, structured sustainable approaches and strong engagement, especially with transitioning companies, are key. Regulatory incentives could further unlock sustainable opportunities across markets.”

Heather Fleming, managing director, Institutional Business, Gresham House, explained: “Greater collaboration between insurers, asset managers and policymakers will be essential to ensure regulation evolves in step with the market. A principles-based approach that recognises the inherent stability and value of sustainable real assets would help to unlock meaningful capital flows and accelerate progress toward shared transition goals.”