Asian insurers are increasingly focusing on environmental, social and governance (ESG) factors in investments, courtesy of a mixture of carrot and stick factors that has already encouraged their European peers to begin embracing the principles.
Institutional investors in the region have been generally slower to incorporate ESG factors on investment decisions and strategies than their European peers, and this includes Asia-based insurers as a group, said Sally Yim, associate managing director in the financial institutions group at Moody’s Investors Service.
“That’s partly driven by the fact the investors haven’t demanded as much, but at the same time, the regulators and customers are also not as active compared to those in Europe in expecting insurers to incorporate ESG factors into their investment decisions,” Yim told AsianInvestor.
One issue is a lack of easily identifiable ESG-friendly assets. China has traditionally been the highest issuer of green bonds, but overall level of issuance in Europe is far higher than in the US and Asia, which also helped explain why the predominantly fixed income-investing Asian insurers are less active at this stage.
However, Yim noted that “we see an increasing awareness and efforts of Asian insurers on ESG as there has been more focus on it by regulators, investors and customers, as well as to compare with their global counterparts”.
Moody’s expects global green bond issuance to hit $200 billion in 2019, a bit over 20% larger than the $167 billion recorded in 2018, which itself was 6% higher than the total volume in 2017. The rating agency said a combination of strong investor demand, increased governmental focus on addressing climate change and an increasing number of (predominantly European) repeat green bond issuers are ensuring growth in overall issuance.
Asia-based insurers should increasingly look to invest in these deals. The companies are increasingly incorporating ESG factors in their investment plans, while insurance industry associations establishing the Principles of Sustainable Insurance and promoting the importance of sustainability and ESG integration in the investment process. Another reason for increased interest in ESG is the increased emphasis on ESG among credit rating agencies like Moody’s.
Analysing the exact level of insurer engagement in ESG is difficult, because there are so many approaches the investors can take, said Helga Birgden, Mercer’s global business leader for responsible investment.
One example of a more active investor is Japan Nippon Insurance, which has invested around ¥370 billion ($3.4 billion) into ESG-themed investments, including green bonds, social bonds and renewable energy projects, said Birgden.
Another Japanese insurer, Tokio Marine, has taken a different ESG approach so far. It has focused on working with the government to help it address its national energy policy needs, to prevent damage due to climate change from spreading. The insurer is examining the possibility of installing and operating renewable energy facilities in its companies while also providing products and services such as liability insurance concerning environmental pollution and environmental consulting. In addition, Tokio Marine is looking to conduct research into climate scenario modelling, to increase the possibility of anticipating future climate-related events.
Japanese and Australian asset owners have generally been the most sophisticated in terms of incorporating ESG considerations, with the factors playing a more important role in the enterprise risk management (ERM) and investment decisions of Japanese investors, said Yim. Insurers may have been slower on the uptake then some of their pension peers, but they are coming under increasing pressure from regulators and policymakers to allocate more capital to support a sustainable economy.
European insurers have already received increasing pressure from regulators and the public to divest from their investments in thermal-coal linked assets and to stop insuring companies operating in the sector. Similarly in Asia, public and regulatory scrutiny has been rising on insurers to reduce their involvement with the palm oil industry, a large contributor to deforestation and ultimately climate change.
There are potential advantages for insurers that fully embrace ESG when investing, argued Yim. A responsible investing approach encourages insurers to think long term, diversify their portfolios, manage regulatory trends, and consider more broadly the material risks and opportunities across all asset classes. It is also an opportunity to expand a brand’s reach.
“We view positively the proactive steps taken by some insurers to moderate their exposure to carbon transition risk, including reducing exposure to assets at higher risk of being stranded,” Yim said. “These insurers could, in fact, benefit from reduced exposure to potential environmental liability risks associated with thermal coal industries.”
To date the market’s focus has been mostly on using ESG integration for equity investments, but Birgden argued that it makes sense for insurers to adopt the assessment strategy for fixed income portfolios, which typically account for about 85% of their investments.
With an ESG integration approach, investors judge the issuers of assets by their commitment to a set of environmental, social and governance metrics. Birgden argued that this approach can potentially offer risk management benefits, by revealing borrowers with poor governance or information disclosure, or which are exposed to climate change but haven't done enough about it.
ESG integration has to date had the most success in corporate debt, where it’s easier to identify companies' ESG-friendly revenue flows or spending plans, although there has been some early innovation in the sovereign, sub-sovereign and securitised sectors too, Birgden noted.
Were insurers to use more of the available tools to consider ESG integration and model scenarios around climate change, they may be able to better identify how to build resilient fixed income portfolios that can manage such risks, she added.