83% of insurers evaluate ESG within investment processes; up from 32% in 2017

Written by Adam Cadle

21/04/2021

Eighty-three per cent of global insurers now evaluate ESG in their investment processes, in comparison to just 32% in 2017, latest figures have shown.

The tenth annual survey released by Goldman Sachs Insurance Asset Management (GSAM) incorporates the views of 286 CIOs and CFOs representing over $13trn in global balance sheet assets, accounting for approximately half of the global insurance industry. The survey said the growth of ESG evaluation in investment processes has been driven by increased adoption in the Americas.

Motivations for ESG strategy implementation were largely similar year-over-year, with some regional nuances. Global insurers consider the primary driver to be current and future regulation, versus last year’s outsized driver being risk mitigation. Globally, risk mitigation was a near second this year. Current and future regulation was the primary motivator in Europe and the Americas. Consistent with 2020, Asian insurers reported shareholder, creditor and customer considerations as the dominant drivers of implementation.

Consistent with 2020, negative screening and avoidance tools are most utilised across regions. Globally, insurers most commonly cited the intention to implement reliable reporting of ESG values in the portfolio over other ESG considerations. Negative screening and avoidance tools were noted to be the most common ESG consideration across insurer portfolios. Year-over-year, respondent implementation increased 12%, driven by increased utilisation in Europe and Asia. In Europe, 77% of insurers employ negative screening and avoidance tools, and in Asia, 73% reported utilisation.

In a marked change from the past two years, less than half of insurance investors believe we are in the later stages of the credit cycle. European insurers are the regional outlier, with 69% who contend we are in the later credit cycle stages in comparison to only 36% of American insurers. However, despite still working through a global pandemic, 52% of global insurers find that credit quality is not deteriorating. In fact, 12% believe credit quality is improving. Globally, there is little consensus on whether spreads are expected to moderately tighten or widen.

In 2021, 40% of insurers are neutral-to-positive on the investment landscape, in comparison to only 29% of insurers in 2020. This 11% improvement speaks to increased optimism as we move towards a post-pandemic world. Thirty-four per cent of global insurers are planning to increase the risks in their investment portfolios, likely by shifting cash balances into higher risk asset classes. GSAM said it expects a continued retraction of liquidity in favour of increased equity, credit and duration risks.

As global interest rates maintain historically low levels, global insurers are increasingly seeking return-enhancing assets. Private equity, middle market corporate loans, infrastructure debt, CLOs, and emerging market corporate debt are the top five asset classes where global insurers are planning to increase their asset allocations.

There is a global consensus that regulatory capital requirements will most strongly impact asset allocation decisions. However, European insurers also greatly consider changes in liability profile and product sales as a key allocation determinant. Similarly, Asian insurers expect modifications in accounting rules to also play a role.

Credit and equity market volatility continues to pose the greatest risk for global insurers. Concerns around US monetary tightening and inflation rose materially while concerns around China’s economy fell. For Europe and the Americas, the top macroeconomic concern this year was an economic slowdown. Asia ranked US monetary tightening as the greatest concern in 2021.

The survey also reavealed that 52% of global participants to the survey ranked the global pandemic to be the top geopolitical risk to their investment portfolios over the next 12 months. The US-China Trade Conflict, and US politics and party transitions made up the secondary and tertiary risks. In addition, 79% of global insurers said they are concerned about inflation within the next five years.

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