SH 2025 Perspectives Change Consulting
Since the beginning of 2025, the geopolitical focus has shifted, with a renewed focus on defence budgets, inflation control, and managing impacts of tariffs. Unfortunately, the 800-pound gorilla in the room, climate change and climate risk, has been overlooked, de-prioritised, or worse, ignored completely.
This interview with Subbu Loganathan, ESG Advisory Lead at Sheffield Haworth, explores key aspects Asset Managers, Asset Owners and Insurers should consider when navigating Climate-Related Financial Risks and Disclosures.
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With climate change perceptions and regulations evolving significantly since the beginning of 2025 worldwide, what compelling business case exists for organisations to continue their sustainability operations?
As global sentiment and regulations on climate change continue to shift, the business case for organisations managing climate risk impacts remains strong, driven by both regulatory and performance incentives. The importance of integrating climate risk into investment strategies has become even more relevant with each climate event of increasing severity. Businesses must recognise climate risk as they would market risk, an essential factor in decision-making that impacts long-term sustainability and profitability.
Key regulatory drivers are pushing companies to take proactive steps, with many industries voluntarily adopting climate mitigation and adaptation strategies. The focus has shifted toward mitigating climate risks to reduce global warming, as well as adaptation to a new uncertain world. The ability to integrate climate risk effectively into investment strategies reflects an organisation’s resilience and adaptability in a rapidly changing economic landscape.
The insurance sector exemplifies this shift in approach through increased catastrophe risk modelling and embedding climate considerations as a fundamental part of underwriting policies. Insurers face unique challenges in adjusting their exposure to climate risks, as policies are inherently long-term and actuarial risk allocations with associated investments are materially impacted. As a result, insurers have developed robust frameworks to assess and manage climate risk, setting a precedent for other sectors looking to integrate climate change and sustainability into their operations.
What fundamental principles should guide the process given the numerous risk categories in climate risk assessment?
Climate risk is financial risk. Climate Risk is geopolitical risk. It poses profound investment risks to asset managers, asset owners, and insurers. Hence, Climate Risk should be treated like any other systemic risk within portfolio management. Integrating climate risk principles into investment, pension and insurance frameworks ensures comprehensive risk assessment at both the security level and sector level, enabling portfolio managers to make informed decisions.
For insurance companies, climate risk plays a critical role in underwriting, directly influencing premium calculations for physical risks. Higher risk should correspond to higher premiums, ensuring financial stability and accurate risk pricing. Certain sectors and geographies might become uninsurable, especially within the Property and Casualty space. Insurer and Pension investment strategies must be calibrated based on appropriate liability matching, ensuring that climate risks are appropriately accounted for. If a particular asset becomes un-investable, it must be factored into long-term portfolio planning.
Certain investment sectors and domiciles may become increasingly risky for asset managers and pension funds due to extreme climate exposure and a lack of adaptation methods. Investment strategies must be carefully reviewed with a physical and transition risk lens to ensure portfolio climate risks are factored into investment decisions.
How can Asset Owners balance fiduciary duties with mitigating long-term climate risks while adapting effectively to climate change?
Asset Owners, particularly UK trustees of pension schemes, are increasingly required to provide disclosures of their climate risk exposure and the associated risks faced by their investors. Investor expectations largely drive this imperative, as they are the ultimate owners of the capital, whether they are California teachers or retirement pensions, Japanese retirement funds, Norway’s state fund, or UK Local Government pension schemes. Given the long-term nature of pension investments, managing climate risk effectively aligns with fiduciary duties while ensuring the sustainability of long-term capital allocation.
To adapt to climate change without compromising fiduciary responsibilities, Asset Owners must integrate climate risk into investment strategies, treating it as a financial risk similar to market volatility.
Climate risk is a fundamental investment consideration and a strategic necessity. Proactively integrating it into pension schemes and investment strategies allows Asset Owners and Managers to meet investor expectations, mitigate financial threats, and position themselves as leaders in sustainable investing.
What do you believe will be the future of climate risk reporting and the impact it will have on Asset Managers, Asset Owners and Insurers?
Climate Risk Reporting will eventually be integrated into fund factsheets and annual/quarterly financial reports, providing quarterly and annual insights into physical risk, transition risk and climate temperature alignment. For asset managers, embedding these factors into investment decisions will not only drive regulatory alignment but also enhance market positioning. As climate-conscious investing becomes a key differentiator, transparency in reporting will be crucial.
Asset owners should incorporate climate risk data into mandated annual benefit statements, ensuring investors have a clear view of climate exposure and resilience. For pension holders, climate risk remains critical, especially as generational shifts accelerate demand for ESG-driven investments.
Insurers can leverage their advanced modelling techniques to provide detailed risk assessments in annual statements, helping stakeholders navigate the complexities of climate-related exposures. Beyond compliance, insurers have a unique opportunity to integrate climate risk analysis into underwriting strategies. By refining risk models, insurers can enhance portfolio resilience and unlock new market opportunities. Climate risk transparency can drive engagement, foster investor trust, and improve financial performance.
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If you would like to read the full report on Navigating Climate-Related Financial Risks for Asset Managers, Asset Owners, and Insurers, please request a copy by emailing enquiries@sheffieldhaworth.com
