Pressure to adopt environmental, social and governance (ESG) criteria is increasing on pension schemes all the time but insurance companies seem much less likely to be in the conversation.
A recent Funds Europe roundtable on insurance asset management considered whether insurers were finding it hard to adapt to ESG because they mainly hold bonds, which unlike equities give them no influence over companies, and our panel considered whether bond managers need to be more innovative in helping insurance clients become ESG, sustainable investors.
However, the roundtable also heard that insurers could be more active on ESG than they are given credit for.
Here is an excerpt from our insurance asset management roundtable.
Funds Europe – How can insurers integrate sustainability principles (ESG) when considering their wide roles as risk managers, insurers and investors? How important would it be for firms to collaborate and create standardisation in this field?
Ankit Shah, QIC Global/Antares Underwriting – The ESG debate has been more associated with investments and less on underwriting. They should go hand in hand. Insurers lack checks to see if what they are underwriting is ESG-compliant, although Lloyd’s of London is promoting ESG in the wider underwriting world.
The other challenge is the global acceptance of an overall ESG framework. ESG is more prevalent in Europe compared to elsewhere.
Ric Van Weelden, senior partner, Indefi – Essentially, there’s no way back from it now, but where insurance companies are on this topic differs between jurisdictions across Europe. It can be regulatory-driven, or potentially it’s a question of culture. For instance, the regulatory driver is stronger in France, but in the Nordics and the Netherlands, it is the market itself demanding this. In either case, the Nordics, the Netherlands and France are ahead of the curve in Europe.
The more sophisticated insurance companies and institutional asset owners look at ESG as a major long-term risk issue over 20-30 years. However, the way people go about doing it is very different. Some people screen portfolios, some people carry out engagement, some do integration, and some do a combination of each.
Ajeet Manjrekar, River and Mercantile Solutions – Risk is absolutely the key factor and recognition of this goes back to the topic of holistic balance sheets. The question is, “What’s going to blow you off course? What’s going to put you into a position where your capital gets constrained and you can’t write as much business?” ESG risks are fundamental to that.
However, I would caution against standardisation, because we would get different answers about what an ESG risk represents depending on each entity’s beliefs and risk appetite.
Sean Thompson, Camradata – It is a difficult topic for the insurance industry. They would have to factor in ESG requirements when deciding who to underwrite. This can be very different to their investment balance sheet and possibly even be a conflict with it. I think the insurance market is a little way off from solving that.
The difficulty on the investment side is that the majority of portfolios are fixed income, meaning insurers don’t have a place at the table in shareholder meetings. The asset management industry as a whole needs to work together on how they can exert influence in the fixed income world, get messages across to those companies whose debt they are investing in.
Some insurers will be happy to use an asset manager that has ticked the UNPRI. But really, they should do proper due diligence on the asset manager to fully understand what their ESG principles are and how they implement them.
Manjrekar – An underwriter is a specialist in terms of understanding risk and pricing it. While there might not be evidence of how ESG risks are incorporated in this, at least some of the discussions I have had with insurers suggest that although they don’t talk about it, when they’re pricing risk, they are taking on board ESG. They just don’t disclose it in the way that gets them recognition. On the investment side, there is a lot that needs doing and a lot can be done today. I’ve seen cases where we have footprinted clients’ credit portfolios. A lot of the clients that I work with are buy and hold for much of their core credit assets, so ESG becomes massively relevant to them because they are exposed to downgrades or forced selling.
Phil Irvine, PiRho Investment Consulting – A quoted insurer should be engaging with shareholders because those are the questions that will be asked.
In the UK, ESG pressures and changes on pension schemes will percolate directly through to insurers. In June 2018, the Department for Work and Pensions forced all pension schemes to put into their Statement of Investment Principles how they think about ESG. The exact wording was, “how they take account of financially material considerations including but not limited to those arising from environmental, social and governance considerations, including climate change”.
Every pension meeting I go to at the moment has an ESG section because trustees have to have these updated statements in place by October this year.
Possibly all investors, whether they’re investing directly in equity or through debt – even though debt doesn’t have voting rights – will need to have ESG policies. All sorts of stakeholders will be asking those people, “If you’re stewarding other people’s money, how are you managing this money for our future?”
Thompson – The UK pension scheme NEST has just announced they are no longer going to invest in tobacco. This is not an unusual announcement from the pensions world and the insurance market has got to start noticing what is happening around them. However, the game of catch-up could be quick.
*Read the full insurance asset management roundtable here.
©2019 funds europe
