@Aberdeen Standard Investments.
Our aim was to investigate how insurance investors are responding to environmental, social and governance (ESG) challenges. The full report covers current practice, future objectives and the views of key decision-makers at 60 European insurance companies.
A clear finding of our research was that insurers’ ESG practices are continuing to improve but still have much further to go. Insurance companies continue to innovate, however, with innovations coming from both pioneering companies and those that have only recently acknowledged ESG.
For insurance companies, sustainable investment practices are a relatively recent initiative. Although most of the market leaders have longstanding ESG experience, 39% of insurance companies claim to have less than three years of active consideration of ESG in their investment policies.
At present, 63% of respondents have formalised action plans dedicated to sustainable investment, indicating that more is to come. All respondents are looking to improve. One respondent, a French life insurer, put it like this: “There is still much we do not know. It is a continuous effort to improve our practices”.
When it comes to ESG, most insurers fall into one of three categories. The first category consists of improving pioneers. These are generally large companies that have been at the forefront of sustainable investment. Their practices have evolved along with the maturity of the market. They are at the cutting edge of ESG and continuously seek to sharpen it.
Next are market followers. These institutions are not pioneers but have broadly followed market developments. They rarely innovate but aim to keep up with new themes. They represent the pragmatic core of respondents.
Then there are leapfroggers. These are latecomers to sustainable investing but benefit from the market’s maturity. They seek to leapfrog the competition and provide innovative approaches to ESG, sometimes jumping directly to in-depth climate-risk analyses or impact investments. This group consists mainly of smaller, local insurance companies historically subject to little or no ESG regulation.
The pioneers are continuously exploring the cutting edge of sustainable investment, but innovation may also stem from leapfroggers who exploit the market’s maturity to innovate through new impact or climate frameworks.
Although some barriers to ESG integration are breaking down, the drive towards sustainable investment still faces many challenges. Most of these stem from the nascent nature of ESG practices; others appear more structural.
A challenge highlighted by 46% of our respondents is the lack of homogeneity in the ESG landscape. This covers data (lack of common reporting standards, poor data quality) and methodological divergences in its use. Most respondents said that increased standardisation would improve their ability to assess both individual securities and externally managed funds. One Italian life insurer summed up the situation. “Access to ESG data has been an issue for a long time. Now, we are almost submerged by ESG data. What we really need now is standardisation.”
Another challenge concerns people rather than data. Some 19% of insurance companies highlighted reluctance among their in-house portfolio managers to implement sustainable investment practices. However, most expect this resistance to fade as ESG becomes increasingly mainstream and as generational shifts occur within investment teams.
A further challenge for insurance companies is how to implement sustainability-related changes in their portfolios. Only 24% of respondents view ESG as a primary driver of investment strategy. In defining insurance companies’ investment strategies, asset-liability management, the search for yield and solvency-capital requirements are all regarded as more important. “We consider ESG only when it helps us generate better risk-adjusted returns,” as one life insurer in the UK put it.
In fact, ESG is most often perceived as an additional element to improve the investment strategy – an input into the investment strategy rather than its defining factor.
A sizeable minority of respondents (37%) have taken initiatives to influence strategic asset allocation based on sustainability criteria. However, this has mainly taken the form of increased allocations to private assets (the preferred area for impact and thematic innovation) and marginalisation of less transparent asset classes (e.g. hedge funds).
Insurance companies reported that ESG was more often a consideration when evaluating individual securities (81% of respondents) or the selection of investment products (74%). Most recognise that ESG-integration practices have primarily manifested in investment reporting (70%) and that the impact on investment portfolios has been relatively minor. 60% of respondents note that ESG has affected investment decisions on rare occasions at most.
Life-insurance respondents also highlighted a structural constraint linked to their buy-and-hold strategies. As they cannot easily liquidate their fixed-income positions, exclusions and ESG integration are often limited to new investments. This may lead to controversial companies staying in portfolios longer and limits the speed at which new ESG policies may be implemented.
Exclusions are usually restricted to a minimal subset of the investment universe and, therefore, have only a marginal impact on the overall investment strategy. Similarly, although allocations to impact and thematic products are growing, they are often limited to peripheral asset classes (mainly private assets) and are hindered by the lack of adequate products on the market. That represents a clear opportunity for investment managers.
