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Spoilt for Choice

02/12/2019

 

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

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