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Spoilt for Choice



Environmental, social and governance (ESG) factors are more important than ever in the investment world – but insurers have been slow to catch up with the trend.

However, there is plenty of evidence that the insurance sector is now on board in embracing ESG strategies, alongside their institutional peers in the pensions sector.

According to the 2019 edition of Goldman Sachs Asset Management’s (GSAM) insurance investment survey[1], 62% of global insurers ranked ESG or impact investing strategies among those they were considering for implementation. Three in 10 insurers employed dedicated ESG investment strategies with a further 23% planning to do so.

In contrast to institutional pension funds, insurance companies face ESG risks to both their assets and their liabilities, especially regarding environmental issues. Property and casualty (P&C) insurers and reinsurers, for example, are particularly exposed to natural disasters, and the changing climate given the recent increases in extreme weather events[1].

“Insurance investors are particularly interested in ESG – or should be – since ESG aspects affect both sides of the balance sheet,” says Mark Fehlmann, head of European insurance at DWS.

“An insurer active in Florida in almost any type of business line will take into account the impact of natural catastrophes when pricing insurance… Why wouldn’t an insurance company do the same on the asset side and try to factor in impact of asset exposure by climate risk or natural catastrophes on asset holdings?”

Such threats could be more immediate than many people realise. David Burt, CEO and founder of hedge fund firm DeltaTerra Capital, has reportedly[2] positioned his funds to short stocks that are anticipated to be affected by floods in US coastal areas. (Burt previously set up another firm, AlderTree Capital, in 2006 to short the US subprime mortgage market.)

Despite the evidence, insurers are yet to fully engage with climate change risks. GSAM’s survey shows that 8% of life insurers and 6% of multi-line insurers rank climate risk as a primary concern. Among P&C, non-life and health insurers, none ranked ‘climate‘ as a primary concern.

“European insurers generally are trying to figure out how to implement ESG and are, in many ways, dependent on – and eagerly waiting for – guidance from regulators,” says DWS’s Fehlman. “At risk of sounding obvious, clearly insurers for the most part would like to invest in an ‘ESG way’ as long as investment returns aren’t impacted.”

Fortunately, asset managers have been innovating for many years to address the growing demand from clients and regulators for climate change and other ESG risks to be factored into their portfolios.

There is a growing body of evidence[3] that investing ‘responsibly’ does not detract from investment returns – and, in some cases, may even improve outcomes. While most firms will now proclaim that ESG is integrated into their portfolios, how this manifests varies from company to company.

For investors seeking exposure to a specific theme, there are several funds and strategies available in areas such as water and renewable energy. Specialist managers such as Impax Asset Management focus on making a positive environmental impact through their allocations, while larger asset managers have a range of strategies focused on achieving positive impacts or excluding poor ESG performers.

For those interested in a more targeted approach, the UN’s Sustainable Development Goals (SDGs) offer a way of addressing 17 specific themes aimed at alleviating major global issues and threats such as poverty, inequality and sustainable energy provision.

Dutch pension funds APG and PGGM, earlier this year, launched an artificial intelligence-powered investment platform to help major investors invest efficiently into strategies targeted at the SDGs[4]. Asset managers such as Robeco and BMO Global Asset Management also offer investment strategies targeting the SDGs.

As demand for ESG-aligned assets grows, so does competition for the best investments. These conditions “clearly favour larger investors” such as insurance companies, according to law firm DLA Piper. In a recent paper on ESG investing, partners Les Koltai, Natasha Luther-Jones and Heike Andrea Schmitz explained that, in renewable energy in particular, conditions favoured large insurers or pooled groups of smaller players.

As well as potential exposure to climate risks, the DLA Piper authors highlighted a major risk for insurers if they fail to engage with ESG investing: reputation.

“Being associated with the violation of social or governance issues may lead to considerable reputational damage,” they wrote.

“Insurers are experiencing a stronger demand for ethical investments… By investing responsibly, insurers do not just want to be ‘good’ − they are targeting sustainable long-term returns, reducing risks for their core business and improving their public reputation.”

In early 2020, Research in Finance is teaming up with sister company, Research in Insurance to launch The UK Insurance Investment Study.

This project will provide a deeper understanding of the investment strategies within the asset side of UK general insurance companies. How asset managers can effectively communicate, influence and engage with this audience.

There is an opportunity for a limited number of stakeholders to be involved and help shape this influential study. If you are interested, please contact Richard Ley or Phil Davison on 020 7104 2235

Pulse study: The portfolio and mindset shifts among private investors following Extinction Rebellion protests


Londoners and cityworkers around the world felt the full brunt of the Extinction Rebellion protests earlier this year but private investors have also said the movement has had an impact.

Research in Finance’s November edition of its Private Investor Pulse study, which surveyed 303 individuals, revealed that one in seven private investors have begun to think differently about their investments as a result of the environmental movement Extinction Rebellion.

This is particularly surprising when you consider 67% of the private investors who took part are aged 55 or over – not an age group that is commonly associated with sustainable and environmental investing.

Extinction Rebellion was formed in 2018 to force government action on climate issues and has engaged in a number of protests around the world, including several in London in April and October this year which caused travel chaos throughout the capital, to highlight the cause. Activists targeted the House of Commons and London Fashion Week in a bid to “communicate the urgent need for change”.

Known as XR, the group are calling on the government to declare a “climate and ecological emergency” and take immediate action to address climate change in order to reduce carbon emissions to net zero by 2025.

In our Pulse study, when asked ‘has the ‘Extinction Rebellion’ movement affected how you think about your investments?’, 14% it had had an impact, which included an array of adjustments to portfolios.

For example, respondents said they were investing more in renewable and sustainable companies, were being more considerate of ESG criteria and/or avoiding oil & gas companies.

It was also encouraging to see that although 51% of private investors said Extinction Rebellion had no impact on how they thought about investments, 20% of this group had already thought about issues highlighted by the movement before Extinction Rebellion hit the headlines, indicating that ESG credentials and responsible investing is really beginning to be integrated into investors’ portfolio.

Nonetheless, other private investors said they disagreed with Extinction Rebellion’s approach and/or dismissed it as a “short-lived protest group” that did not offer practical solutions – a mood that was given airtime by the press at the height of the disruption.

Intergenerational Wealth Transfer

In this wave, RiF also asked private investors about their plans to pass on their investment pots.

For background, the majority (52%) said they had children over the age of 18, while 16% had children under 18 and 35% had none. Additionally, 7% said they had grandchildren over 18, while 29% indicated their grandchildren had not yet reached adulthood and 69% said they didn’t have grandchildren.

Unsurprisingly, of those that have children and grandchildren (of any age), 94% plan to pass on an inheritance to their children and/or grandchildren.

But more worryingly, only 49% have actually had discussions with their children and/or grandchildren about arrangements for their estate.

Of those who expect to pass on their inheritance, two thirds (67%) expect to pass on the majority of their current estate. 9% said they would pass on half of their estate and 14% said ‘some’ of their estate.

Do you plan to pass on an inheritance to any of your children and/or grandchildren?

Source: Research in Finance. All respondents with children and/or grandchildren (198) .

We also wanted to explore how much private investors wanted to pass on what they have learned while managing portfolios; when asked if private investors had passed on either some or a little investment knowledge to their adult children, 77% said they had, with only 8% said they had “taught them everything they know about investments’.

Reinforcing the link between the younger generation of investors and more responsible investments over half (53%) of private investors said their children or grandchildren have or will have a stronger interest than themselves in ethical/sustainable/responsible investing. Only 6% said interest in these investments will be weaker while 28% said it will be the same level of interest.

A number of investment managers have moved in the direction of ESG investing over the past decade (or more), readying product ranges for what was previously unseen demand for more responsible investors. These now stand ready to reap the rewards for their early preparation as we anticipate the figures above indicating a shift in mindset towards ESG will continue to rise.

Which of the following statement do you think applies to you and your children and/or grandchildren?

Source: Research in Finance. All respondents with children and or grandchildren (198)

RiF has launched the UK Responsible Investment Study (UKRIS), a regular study in this increasingly critical area. This study shall focus squarely on professional investors, retail and institutional, and their view of ESG and responsible investments.

This biannual syndicated study will truly be one of a kind, and as such aims to gather support from many asset management firms. For more information on this study email us here and the team will send you a synopsis of the project.





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