As long-term asset owners, insurers, by the very nature of their investments, should be aligned with the concept of sustainability in order to stand the test of time, says Rodney Gollo, head of risk at Bupa Asia Limited.
And he believes there are numerous opportunities for these investors within Asia. However, many emerging markets in Asia, and globally, are often viewed as high risk for institutions. Factors such as currency risk or political risks may make many of the investments in these regions not particularly attractive for these long-term investors, Gollo told AsianInvestor.
“One area I feel insurance companies could play a role, particularly when it comes to accelerating and mobilising - not even climate finance but, just general finance for emerging frontier markets - is this concept of blended finance,” he said.
Bupa Asia Limited
Blended finance is an approach to structuring investments to facilitate the crowding in of private sector capital, predominantly in developing countries, using public or philanthropic sources of capital to improve the risk/return profile and mobilise private sector funding from institutional investors.
This is usually done via a multilateral development bank, international financial institutions or foundations and endowments on the public side, said Gollo.
“In that regard, blended finance can provide an easier route for the private sector to invest in companies, projects or initiatives aiding the sustainable development goals (SDGs). Traditionally blended finance solutions which include loss guarantees, grant funding or technical assistance have tended to be better suited to the SDGs that generate commercial returns. For example, Goal 8; decent work and economic growth, and Goal 9: industry innovation and infrastructure,” he said.
Other goals such as Goal 3: good health and well-being, and Goal 6: clean water and sanitation, have so far been less targeted using blended finance solutions, in part because these have tended to be primarily government funded, he explained.
“However, with Covid and inflationary pressures leaving many economies fiscally vulnerable and constrained, blended finance solutions could help fill this gap,” said Gollo. “Given that blended finance structures usually feature loss guarantees or other forms of insurance protection, insurers can help facilitate such investments.”
ASIA’S ESG ECOSYSTEM
While environmental, social and governance (ESG) is a broad term and can mean different things to different people, Gollo categorises the ESG ecosystem as reflective of four interdependent dynamics: what regulators are doing; what companies are doing; consumer behaviour; and ESG investing.
“Each of these dynamics relies on the other in developing and sustaining a long-term favourable environment that addresses ESG issues as a whole,” he said.
In terms of regulation, Gollo said the ecosystem is starting to grow in relation to climate risk and that several regulators are coalescing around the Task Force on Climate-Related Disclosures (TCFD) as a standard bearer.
“I feel regulators mandates will increasingly need to broaden on social issues and how these relate to climate risk issues, especially as countries emerge from Covid and may have had certain social and economic gains eroded.
"Given that climate risk is a highly interdependent risk factor, regulators will also need to be more innovative in their thinking to help evolve companies' thinking around climate risk,” he said.
“This in turn will likely further help governments to consider these factors in different ways, and thereby align policy making in a way consistent with addressing ESG issues,” Gollo added.
He said firms are having to view their business models through a slightly broader lens, especially as it relates to small and medium sized enterprises (SMEs) and micro and small and medium sized enterprise (MSMEs) which by volume make up the majority of companies in Asia, he said.
“Here I feel the ecosystem is less developed, but progress is being made - it requires continuous engagement across the entire value chain of an organisation and at board level.”
In terms of consumer behaviour and citizen awareness of issues ESG addresses, Gollo feels that, particularly from a climate perspective, the Asian region has historically been exposed to acute natural risks over the past years such as floods, typhoons, cyclones, droughts and heatwaves.
“In that regard, I feel the level of citizen awareness and exposure to environmental and social issues is high in Asia. Whether this has translated into an established consensus amongst consumers however, I feel there is still room for growth,” said Gollo.
ESG investment is where Gollo feels the ecosystem has, and continues, to see the most growth and diversification.
“Sustainable finance, for example, and the role financial and non-financial services firms are playing through the issuance of ESG-labelled bonds is growing in the region, and many of the large asset owners in the region are taking ESG investing and integration more seriously," he said, adding that fund managers are also integrating ESG into their stock selection.
CHALLENGES AND STRANDED ASSETS
Along with the growth of ESG investment products, the perennial risk associated with greenwashing, or ESG funds in name only, has the potential to limit the credibility of ESG more broadly.
“However, even in developed markets such as the EU and the US we’ve seen companies and funds face increased scrutiny over their ESG credentials. Asia is no different, and it is something which needs to be managed closely,” said Gollo.
For investors in the region transitioning to more sustainable and ESG-focused investments, certain common challenges remain, among them the availability of reliable data, transparency and comparability of products.
“This naturally links to issues in setting the targets to decarbonise, deciding on strategies based on one's portfolio composition, all the while seeking to ensure you're not compromising on financial performance,” said Gollo.
However, a more practical challenge that insurers face is around transition risk, specifically managing stranded asset risk, he said.
“This is an area I feel regulators could help companies in the future. Given Asia has some of the highest emitting countries in the world, I feel regulators could help insurers, by having frameworks and guidance to better understand, assess and manage stranded asset risk.
"This would help insurers to better identify corporate and business models for which the costs of transition might be high and where to focus their engagement activities,” said Gollo.