Insurers are being subjected to increasing expectations around transitioning their businesses – including their investments – towards a more sustainable approach.
In Clear Path Analysis’s recently released Insurance Asset Management, Europe 2022 report, several market experts from insurance groups, including Aviva, New Re., LV+, and ReAssure, explore what ESG themes are key for insurance investors to know with co-investment case studies that explore the opportunities between insurers and third parties.
"A key driver of ESG practices was risk
management."
Andrew Epsom, from Royal London Asset Management, says that a key question for the industry is how investments can make a positive difference to sustainability goals. “Most asset owners currently want a portfolio that is aligned with ‘greening the world’ and a transition to a more sustainable future, including supporting engagement that makes a difference,” he says. This is normally aligned with a strong preference not to compromise returns – or even achieving this in a manner that delivers enhanced returns.
According to abrdn research, in 2020, 82% of life insurers and 67% of P&C insurers in European countries said a key driver of ESG practices was risk management but far fewer saw sustainable investment as an opportunity for revenue.
“Is it possible to deliver both the environmental outcomes that society is demanding from large asset owners such as insurers, as well as realising financial benefits from this to support policyholders and shareholders?” says Epsom.
Insurers are adopting direct approaches to mitigate climate risk by only investing in companies with low or zero emissions currently via negative screens, he explains.
"It will take longer term efforts to tackle carbon intensive industries
to avert a serious climate change outcome."
For instance, as part of the United Nations-convened Net Zero Asset Owner Alliance, 35 institutional investors including insurers, which represent $5.5 trillion assets under management pledged their commitment to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050.
However, whilst this will result in a shorter-term greening of these insurers’ portfolios, at a holistic level it will not achieve society’s overall decarbonisation objectives.
Achieving change will be a long process and the modern economy will still need to be reliant on fossil fuels for some time. “It will take longer term efforts to gradually tackle more carbon intensive industries to avert a more serious climate change outcome. For most insurers’ investment portfolios, this means embracing companies in transition,” Epsom explains.
Epsom says the most material impact from corporates towards sustainable development comes from transitioning business activities to a sustainable path – what he calls ‘improvers’ - as well as enabling someone else’s transition – ‘enablers’ - or both.
"The volume of assets managed with commitments to engage or
vote on ESG issues grew by 41%."
This is already changing the market in recent years, according to the UN Principles of Responsible Investing (PRI) between 2014 and 2016, the volume of assets managed with explicit commitments to engage or vote on ESG issues grew by 41%. “In Europe alone, engagement and exercising voting rights is the third most popular responsible investment strategy,” it said.
Where there is the flexibility in an insurer’s sustainable investment policy to have a longer term and more nuanced approach to supporting the transition to a lower carbon economy, says Epsom. “The fact is that the climate risk problem cannot be solved through divestment. Insurers, as meaningful holders of capital, have a role to play in implementing change through facilitating improved engagement with higher emitters.”
“This can provide material benefits for both the insurer and society,” he adds.
