Insurance company Prudential prefers being an active investor that engages with portfolio companies to carry out decarbonisation strategies.
“We are focused on engaging with portfolio companies, after completing our current divestment strategy,” Diana Guzman, group director of environmental, social and governance (ESG) at Prudential plc, told the audience at AsianInvestor’s Insurance Investment Briefing in Singapore on September 27.
Guzman pointed out that long-term value creation is a matter of fiduciary duty, and such responsibility means managing all the material risks that can impact one’s portfolio — including climate-driven risks.
“The holy grail is to balance financial returns with ESG objectives. ESG starts as a risk management tool, but as we move more into impact, driving impact, while driving alpha, that is exactly what we should be figuring out right now. So, it is the same for all insurance companies,” Guzman said.
AHEAD OF SCHEDULE
The insurer started its decarbonisation journey with a responsible investment policy, which integrated exclusions in the insurers’ portfolio, and specifically contained a coal divestment policy.
It also committed to become a net-zero asset owner by 2050. In August, Prudential released its 2030 interim target a year ahead of time, because it had surpassed its 2025 investment portfolio target of reduction in carbon emissions intensity — against its 2019 baseline — through its divestment policy.
By the end of 2022, the insurer had reduced the weighted average carbon intensity (WACI) of its investment portfolio by 43%.
“It shows you the power of divestment ... we are focused on further evolving our engagement approach for real world impact,” Guzman said.
Prudential has moved beyond the relatively low-hanging divestment fruits and is instead actively engaging with portfolio companies when needed.
“We want to support companies with their own transition efforts and help them understand why they need to disclose to CDP (the Carbon Disclosure Project) and why they need to set up targets aligned with science. We raise their awareness of what a credible climate transition plan is,” she said.
Prudential discloses climate efforts according to the Task Force on Climate-Related Financial Disclosures (TCFD), and it is also making a move on the International Sustainability Standards Board (ISSB).
“We do our homework in terms of understanding what are the risks and opportunities. We spend considerable amount of time understanding the risk to our portfolio,” Guzman said.
The insurer performs climate risk stress-testing scenarios and works to understand the role of finance in the transition. For that, Guzman emphasised the engagement strategy through Prudential’s capital asset manager Eastspring, as it supports the insurer needs to match its liabilities in local currencies within various markets.
“We are in markets like Malaysia, Vietnam, Singapore, Hong Kong, Kenya, and Uganda not for the next three to five years, but as a life and health insurer for the next 20 to 30 to 50 years. We are a long-term investor, and for some of these markets, we can only invest locally and in local currency,” Guzman said
This requires Prudential to engage and actively participate in supporting these markets’ transition to climate-related frameworks.
“We engage with governments and regulators and have a lot of conversations about climate scenarios, importance of data transition, finance transition, and so on. We look for opportunities and how we can be an active participant in financing the transition,” Guzman said.
She explained that Prudential has also invested $2 billion in climate investments. That includes $1.8 billion in green bonds, the first solar power project in Vietnam, and infrastructure in Cambodia.
“It is about risk management and managing your portfolio in line with your fiduciary duty,” Guzman said. “On the other side, there are also opportunities in this space that we as long-term investors can have the power to move the needle. Investing according to our fiduciary duties doesn’t stop us from finding alpha and impact at the same time.”
This story has been updated with new quotes throughout.