Insurance firms, like other asset owners, are fast ramping up their focus on responsible investing, driven in large part by policymaker moves to encourage the growth of sustainable finance and investment.
With European governments leading the push for financial institutions to incorporate environment, social and governance (ESG) policies into their investment processes, Asian insurers can expect similar pressures from regulators, as well as from shareholders and clients.
At one event last month in London, firms such as Germany’s Allianz and UK-based LV= discussed what they are doing on this front and the challenges that they face.
“In terms of ESG and how it applies to our investment portfolio, to date we’ve taken the approach of outsourcing that to our asset managers,” Emily Penn, capital initiatives and investment director at LV=, said during a debate at the Insurance Asset Management Conference on November 28.
“But we’ve now got to the stage in our evolution where, similar to a lot of other companies, we recognise that’s not good enough now,” she said. “We need to take our own stance, form our own views and ask the asset managers to implement them on our behalf.”
“We’re going through that journey with our senior management and with our investment committee – around education, what is ESG, and what type of stance do we want to take throughout our portfolios.”
One recent development from the UK’s Prudential Regulatory Authority (PRA) is that insurers must, by November 15, have appointed a senior function-holder to oversee the management of financial risk that results from climate change.
Both Penn and Ye Ying, Allianz’s UK chief investment officer, see this as a positive move.
LV=, which has some £12 billion ($15.7 billion) under management, has appointed its chief risk officer as the function-holder, Penn said, though it is also common for firms to pick their chief financial officer (CFO).
“[The PRA requirement] has helped get senior management’s engagement,” she added. “It was very easy to say ‘this is a problem that’s too far down the line; I’m more concerned with my trading volumes next year’. Whereas now it very much has to be on the board agenda.”
REGULATORY PRESSURE RISING
Regulatory momentum is certainly accelerating in this regard, as is the response of the investment industry, noted Will Martindale, London-based director of policy and research at the UN’s Principles for Responsible Investment (PRI).
Globally there have been 730 policy revisions and counting, across some 500 policy instruments (up from around 200 instruments in 2012), that encourage or require investors to consider long-term value drivers, including ESG factors, Martindale told the conference in a presentation.
And just this week, the Bank of England published a discussion paper on its plans to stress-test the largest banks and insurers in respect of the risks associated with potential climate scenarios, and the financial system’s exposure more broadly to climate-related risk.
What’s more, Martindale said, from 2016 to 2019 the proportion of PRI signatories that have actively engaged policymakers, regulators and standard-setters has increased from 44% (of 1,500) to 61% (of 2,500).
Some asset owners are further ahead than others. Allianz, for instance, set up an ESG board at group level in 2012 led by top-level executives such as the CFO and the board member in charge of investment management.
The German firm had also excluded stand-alone coal miners from its investment portfolio by 2015 and plans to phase out coal from the portfolio completely by 2040 at the latest, and likely earlier, Ye said.
Like LV=, Allianz recognises the importance of engagement to drive ESG improvement. “We have a scoring system we monitor together with our asset managers and we have a centralised engagement office,” Ye said. “They go talk to our investee companies; they select a list to engage with regularly.”
The insurer has also looked to refurbish properties in its portfolio in line with ESG principles, she added.
However, it’s still early days in the ESG evolution of portfolios, and challenges abound – a key one being data.
Internal ESG analysis of portfolios is one issue but insurance firms face a rise in disclosure requirements too, said Hugh Savill, director of regulation at the Association of British Insurers, at the same event.
The trouble is that there is no consistent measure of – for instance – carbon intensity in portfolios, LV=’s Penn said. “It will be interesting to track that over time and see how decisions we make impact that metric.”
Ye agreed data was one of the key challenges for ESG investment. Something that might help, she suggested, is the fact that credit rating agencies have started to look more closely at ESG factors when assessing corporates. "I wonder if that will push companies to disclose data more consistently."
Smaller players, meanwhile, may have to continue to rely on their external asset managers for sourcing and disclosing the necessary data.
Corrado Pistarino, chief investment officer of Foresters Friendly Society, a British mutual insurance provider with £300 million ($391 million) under management, said: “I don’t think any small insurance company the size of ours has the capability or the resources to carry out content disclosure. We have to rely on external parties.”
A greater worry for Pistarino, though, is that the investment industry and corporate world is far behind where it needs to be when it comes to tackling climate change.
As a result, “at some point in the next five or 10 years governments will be obliged to come down very hard” by introducing radical requirements to force faster change, he said on the same panel as Penn and Ye.
“That will create a lot of market turbulence because then you really have stranded assets, then you really have financial disruptions, then you probably will have a crisis that erupts,” Pistarino added.
“This is the biggest risk – [and] we are still a bit complacent about the problem.”
The annual AsianInvestor Insurance Investment Forum will return on March 10 in Hong Kong and March 12 in Singapore to address the pressing issues arising from the low-yield environment. Please click here for more details: Hong Kong | Singapore.