Insurance firms, like other asset owners, are being pushed with ever greater urgency to invest responsibly and sustainably. But even insurers in Europe – arguably the leading region when it comes to adopting environment, social and governance (ESG) policies – point to difficulties on this front.
A central, widely cited problem is the lack of an accepted approach to measuring the impact of ESG strategies on assets. More specifically, and further compounding the challenge, are issues such as unclear government policies and backward-looking ESG scores.
A key gripe is that some regulators seem to expect institutional investors to act as “environmental police”, in the words of one chief investment officer at a UK-based insurer. He was speaking during a private session at the Insurance Investment Summit hosted by Clear Path Analysis in London this month.
A senior investment executive from a continental European insurer took a similar view: “If governments don’t want coal-based generation, then why not just regulate for that; why get us [investors] to do their dirty work?"
Ultimately, insurance companies need to justify to their board the effort and resources they are putting into ESG investment.
However, it’s often hard to know what the eventual outcome would be of implementing such initiatives and policies, because of a lack of clarity from government, said the European executive. That makes it harder to act, he noted.
“Unless we understand what policyholders want, why and how should we allocate resources? If the aim of policymakers is to change the world, why not be clearer on engagement policies and on what they want investors to do?”
Ian Coulman, chief investment officer at London-based reinsurer Pool Re, with £6.6 billion ($8.5 billion) under management, made a similar point to AsianInvestor.
“The environment [around ESG-focused investment] has changed significantly in the past 12 to 18 months,” he said, adding that there is growing pressure from regulators, campaign groups and governments on asset owners in this respect.
Yet Coulman said he thought there should be a more concerted effort from both industry and governments worldwide.
“More countries could say, for instance, they have a plan to reduce the number of coal-fired power plants or that they will invest to build the infrastructure necessary for renewable energy or to enable more electric cars – indicating clearly that it is the policy of the future.”
Meanwhile, insurers also point to issues around the processes being put in place to measure progress on implementation of ESG criteria.
“There are methods out there to evaluate companies on their ESG scores, but the criticism we have of that is that they’re all backward-looking,” Coulman said, this time during a panel session at the Clear Path summit.
He cited the example of car maker Volkswagen, which gets a bad score from a sustainability point of view because of the misreporting of its diesel emissions figures. The scandal has led to a huge class action suit that kicked off in late September this year.
“But they [Volkswagen] have reformed, they are pouring billions into battery technology, and I think they’ll continue to do so; they have deep pockets,” said Coulman.
It's a similar issue with the likes of oil majors BP and Shell. They are fossil fuel giants on the one hand, he noted, but are putting money into renewables research.
There are certainly “teething problems” with ESG scoring systems Atanas Christev, head of investment at British insurer Direct Line Group, said during the same panel discussion.
“One problem I have is that a lot are based on questionnaires and disclosure,” he said. “And simply by disclosing, it makes you suddenly look better.”
Indeed, the current approach is something of a marketing “fad”, given that ESG-related risks are nothing new for asset owners, said Jeremy Baldwin, CIO for Europe, the Middle East and Africa at general insurer AIG.
Christev and Coulman echoed this view. Well-governed companies should really be considering how much they pollute as a matter of course, said Coulman, who has been monitoring how Pool Re's external managers approach ESG factors.
However, it may be a while before a coherent, standardised approach is in place for implementing ESG investment policies, they agreed; until then, it makes sense to evolve with the environment and be clear on what your own teams and your external managers are doing to achieve the right ends.