Japanese life insurers are participating in global net-zero initiatives to learn from peers about sustainable investments. But their counterparts, particularly European asset owners, are also learning from them about how to operate in a low-yield environment.
Fixed income-heavy life insurance companies in Japan have been dealing with an ultra-low-yield environment domestically for over 20 years. As some of Asia’s most sophisticated investors, their experience is valuable for those outside the region as the world strives to achieve net-zero.
In mid-October, three of Japan's largest life insurers - Nippon Life, Sumitomo Life, and Meiji Yasuda Life Insurance – joined the United Nations-convened Net-Zero Asset Owner Alliance.
The three life insurers have combined assets of $1.4 trillion, bringing the alliance’s total assets under management (AUM) to nearly $10 trillion. The alliance now has 60 members from around the world.
Their membership followed Dai-ichi Life Insurance's participation in March, making them the first Asian members.
They will be committed to net-zero portfolios by 2050 and establishing interim targets every five years in line with the Paris Agreement’s goal of limiting warming to 1.5°C.
According to the latest data from the Life Insurance Association of Japan, Japanese life insurers have $3.5 trillion of AUM.
“It's perhaps no surprise to see Japanese insurers moving first in the Asia Pacific region, because they are among the most mature and sophisticated investors in the region,” said Max Davies, insurance strategist at Wellington Management.
With over a quarter of assets invested overseas, they understand that the net-zero trend is happening in global markets, so they need to care about the risks they will be exposed to, Davies said.
Life insurers have longer-dated assets, where they might be exposed to higher climate risks in the future, such as rising temperature and sea level, as opposed to short-term risks such as flooding or extreme weathers, he said.
As life insurers tend to have greater domestic than global exposure, Davies said if more Asian life insurers join the alliance, overseas investors would better understand the climate risks and challenges Asia is facing.
Meanwhile, European institutions have learned a lot from Japan, because the country has been dealing with low and negative interest rates for some time, which are a newer phenomenon in Europe, Davies noted.
“The Japanese market is definitely a market that is very well-respected and has provided an educational lens for the markets to look at,” he said.
“This is why we encourage and really care about these initiatives because they bring to a well-rounded global perspective, hopefully over time, a more Asian perspective for reaching net zero by 2050, which is an ambitious goal. But it is probably slightly further down the agenda in Asia because there are a number of other challenges insurers are dealing with,” he told AsianInvestor.
These include new risk-based capital regimes in many Asia markets, which are challenging life insurers to lengthen the duration of their assets. Similar regimes have been well-established in Europe.
With Japanese life insurers’ influence in the industry, Davies expects more asset owners in Japan and Asia to follow suit and join the Net-Zero Asset Owner Alliance.
Takeshi Kimura, a special adviser to the board of Nippon Life Insurance, said he hopes Japanese life insurers can learn about the global trend towards decarbonisation, and about how international standards are being used to measure progress towards net-zero.
Meanwhile, the former Bank of Japan official wants to influence positive corporate behaviour in Japan by collaborating with other life insurance companies.
Nippon Life values engagement with investee companies, and only uses divestment as the last resort.
“It seems unlikely that an investor acting alone in public markets would have sufficient influence over investee behaviour,” Kimura said during a panel discussion of AsianInvestor’s Mandating Change Week event on Oct 25.
“In contrast, collaboration with other investors is likely to reduce costs and enhance prospects of a successful sustainability outcome and therefore achieving the goals of impact investing,” he added.
Edward Baker, policy lead for the Net-Zero Asset Owner Alliance, thinks the membership of large Japanese life insurers signals that more than just a few countries in Europe are interested in net-zero target setting. But he stressed that what's significant about the alliance is not just a 2050 target, but also the near-term accountability.
The alliance has just updated the 2025 target-setting protocol. “No board member is going to be around globally in 2050, but they could well be there in 2025. So near-term accountability announcements made today is vital for the credibility of these initiatives,” Baker told AsianInvestor.
The priority for new members is to learn about the detailed work of target-setting, including the sequence in which the process takes place, key issues, and how to address tricky asset classes, he said.