Many European, Latin American (LATAM), and Australian insurers are racing ahead with ambitious Environment, Social, and Governance (ESG) goals and fiduciary promises, as well as responding to an increasingly forthright regulatory environment, which is emphasising sustainable investments.
However, the US market is still relatively behind on these issues, with some insurers saying ESG is not a determining factor in their financial plans and some regulators hostile to its goals.
Clear Path Analysis’s new “Global Insurance Asset Management report”, produced in partnership with Principal Asset Management, contains interviews with dozens of re/insurers from Europe, Australia, North America, and Latin America and discusses the biggest challenges and opportunities that senior insurance investment and asset management professions faced in 2022 including the rise of ESG.
One of the key facets was that US insurers were taking a divergent approach. ESG appeared less frequently in North American responses from the surveyed insurers. Prominent US insurers were less inclined to consider it, and it also received less interest from Canadian insurers.
Some respondents in the US believed that ESG attitudes are changing; they are embracing it fully, and believe the US will eventually catch up with other regions. They added that the pressure from different parts of the world will likely trickle into North America in the coming years with regulations such as the European Union’s Sustainable Finance Disclosures Regulation (SFDR) an important framework and reason for this shift.
However, the picture is not consistent, as the size and scope of the US industry means there is wide variation. In the report, one major US insurer said ESG was becoming more popular and that it was a key concern for P&C insurers primarily, given their liability profiles.
The 2022 midterm elections could prove decisive in the US industry’s uptake of ESG over the next few years. The Republicans clinched a narrow victory in the House of Representatives, but the Democrats retained control of the senate and also did unexpectedly well at the state level.
"In Europe, funds are taking a more proactive approach
in adopting ESG.”
This could see further decentralisation of ESG policy across the country with legislators and businesses in states such as California and New York embracing it more, but other areas less so.
The reasons for the US being hesitant on ESG are complex, but some attribute it to this state-level divergence. Others list factors such as the presidency of Donald Trump and his changeable attitude to climate considerations – with actions such as leaving the Paris Climate Agreement at a time when ESG was coming to its own in other regions – as a reason for the delayed uptake.
Other players in investment have said there were more granular reasons for the discrepancy. “In Europe, funds are taking a more proactive approach in adopting ESG,” Gaurav Aggarwal, Chief Commercial Officer, at Indus Valley Partners. “That correlates well with passive investment inflows in ESG and impact investing-oriented strategies. In the European Union, we saw swift adoption of the SFDR guideline.”
In the US, Aggarwal said, while there had been initial pushback, he now saw two categories evolving: one where investment managers want to adopt ESG guidelines predominantly for reporting purposes. “[The first are those where] the reports are typically mandated by the allocators or investors. Then there is the second category of firms who are adhering to ESG guidelines as an investment strategy as well,” he said.
In LATAM, the report’s respondents said they were highly aware of ESG and emphasised it in their portfolios – with special considerations being given to the impact of the subject on their economies.
This was because of several reasons; one Peruvian insurer said it was due to the demographics of their market, which skewed much younger than in Europe or North America, as a critical reason why it was seen as so important.
Other reasons they listed were because Peru, for instance, has large parts of the Amazon rainforest within its borders so the deforestation and exploitation of natural resources by companies are on “their doorstep”, which means the negative effects are often seen – whereas it might be more less overtly evident in other countries.
“The awareness that investments we make have a real-world impact,
has pushed us to consider ESG factors in every investment we make.”
Australian respondents were extremely vocal about their passion for ESG, which could reflect their principles or the current mood of the society they operate in.
These insurers were image-conscious of being seen on the ‘right’ side of the ESG debate, and they pushed their sustainability and social responsibility ethos and strategies as being integral to their business plans. One said that “the greater awareness that investments we make have a real-world impact onto the people who we serve, has pushed us to consider ESG factors in each and every investment we make [which] has been the most significant trend for us in the past three years.”
Whether these attitudes will become the norm in the US remains to be seen in the coming year as insurers work to determine if they should lead the pack or remain with the herd.