Asian life insurers’ enthusiasm for Environment, Social and Governance (ESG) and sustainable investing is gaining pace, as evidenced by their sizeable commitments into thematic funds. But many are just scratching the surface in ESG adoption.

In recent years, numerous regional insurers including AIA, Ping An Life and Asahi Mutual Life have become signatories of the UN PRI (United Nations’ Principles for Responsible Investment), but “when you look at any real actions or mandates out there, we haven’t seen a huge amount of [ESG investing] activity,” said Sally Choo, head of institutional business Asia ex-China and ex-Japan at Amundi.

To date Asian insurers have only conducted a handful of ESG investment mandates. In January this year, Nomura Asset Management announced that it had been entrusted to manage a European corporate bond fund for an unspecified amount that incorporated ESG factors on behalf of Japan’s Daido Life. It was Nomura’s first fixed income ESG investment mandate from an institutional investor. It didn’t provide a value of the mandate

This came four years after Nippon Life Insurance awarded Axa Investment Managers a $130 million mandate in 2016 to manage a corporate bond portfolio focused on companies with high ESG rating. However, just this month, it said it has plans for a ¥2 billion ($18 million) investment in US private equity firm TPG Capital's impact fund, which is investing in medical start-ups as the coronavirus takes its toll around the world. Nippon Life plans to work with TPG to learn the ropes, after which it hopes to be able to make independent investments in such companies after three years, it was reported.

Even when Asian insurers look to conduct ESG investing, their approaches tend to be fairly rudimentary. Choo said insurers often cite exclusion screening as part of their ESG strategy, which is generally regarded as the most basic, “preliminary” step to a more fully-fledged adoption of ESG factors when investing.

More advanced strategies include ESG integration and impact investing, along with conducting more corporate engagement and taking active shareholder actions.


 
Sally Choo
Sally Choo,
Amundi

Choo’s observation was reflected in a Goldman Sachs Asset Management (GSAM) survey released on July 22, which showed that 64% of Asian insurers used screening tools for ESG investments, compared with 60% in Europe, Middle East and Africa and 32% in the US.

There is a simple reason for the limited take-up so far: scepticism. Many insurers in Asia are not convinced that ESG investing will improve their returns, even if they realise that it helps to improve reputation, Choo noted.

In fact, available evidence points to the opposite: ESG principles, and particularly ESG integration are additive to investment returns. A study by Harvard Business School in 2015 found that firms scoring well on material ESG issues deliver up to 6% annualised alpha performance.

GSAM's survey also pointed out that insurers broadly consider portfolio risk mitigation to be among the strongest motivators for increased ESG adoption globally over the past year. "This points to the idea that investors believe that the credit worthiness and the future value of an asset is directly impacted by ESG principles," it said.

Choo said that insurers in the region, including those in Hong Kong, Singapore and Thailand are “slowly getting their head around” the fact that incorporating ESG factors can add alpha instead of subtracting it.

In part, the advent of both climate change and Covid-19 is helping to hasten this awareness. Choo said insurers understand that climate change and the environmental risks will impact future investments, and discussions that are centred on the potential risk of not including ESG into assets appear to have been more effective so far.

“We get a lot more acknowledgement when we approach this from a risk perspective rather than a return perspective,” she said.

ESG ETF POPULARITY

While Asian insurers’ ESG adoption remains superficial so far, many have invested in thematic funds, including Exchange Traded Funds (ETFs) to gain exposure. 

“What we are seeing is a huge demand for thematic products,” said Gabriel Wilson-Otto, head of stewardship in Asia at BNP Paribas Asset Management.

Gabriel Wilson-Otto
Gabriel Wilson-Otto,
BNP Paribas AM 

ETFs have generally been gaining credence with regional investors. GSAM’s findings showed that 72% of Asia Pacific insurers who responded to the survey reported using ETFs, the highest proportion compared with 56% in the Americas and 52% in Emea. And the Covid-19 crisis and the market volatility it has brought has accentuated a global rise in interest in ESG ETFs.

Assets invested in ESG ETFs and Exchange Traded Products (ETPs) reached $88 billion, a new record at the end of June, according to ETFGI’s June 2020 ETF and ETP ESG industry landscape insights report.

There is a good reason for this interest. Choo said the process for structuring a mandate is cumbersome, and ETFs offer a quick way to gain exposure and showcase commitment to ESG goals.

“You have to take into consideration capital charge, conduct research and change your investments and that's going to take a longer time to figure out what sort of ESG mandate I want,” said Choo. “A quick way to gain exposure is through ETFs, which we are seeing more and more.”

Japan Post Insurance, for instance, has been gradually increasing its ESG-related equity funds as well as thematic investments such as solar power projects and social bonds, according to an S&P Global Ratings report in February, “ESG Industry Report Card: Asia-Pacific Insurance Companies.”

ACCELERATING ADOPTION

Asian insurers’ slow adoption of ESG could accelerate rapidly in the next few years. By the end of the year, the China Securities Regulatory Commission is expected to mandate that listed companies disclose sustainability information.

A milestone on China's road toward ESG was giant insurer Ping An, which signed up to PRI last year. It was the first asset owner – rather than asset manager – in the country to do so.

In neighbouring Hong Kong, the Hong Kong Exchange has also updated its ESG guide and listing rules, and amendments took effect on July 1 this year, further strengthening its mandatory disclosure requirements.

“In Europe, the US and Australia, it's mainly been driven by asset owners and retail investors who have started demanding these types of products. In other parts of Asia, regulators and governments have played a larger role in driving the adoption of ESG,” said Wilson-Otto.

However, more is needed to drive ESG and impact investing in Asia.

“It requires a cultural change. It's not just about providing someone with a dashboard and an ESG score. It's about changing the way that they perceive value and risk,” he said.

According to GSAM's report, Asian insurers are slowly warming up to the idea of the importance of ESG in investments. In 2020, 12% of Asia's respondents considered ESG to be a primary investment consideration, compared to 2% in 2019 and 9% in 2018.

Both Choo and Wilson-Otto said they expect ESG principles to play an increasingly larger role in Asian insurers' investment portfolio going forward, although the pace of adoption will be slow.