Time for insurers to embrace the ESG opportunity

Written by Sean Thompson, Managing Director & Sam Buttress, Associate, Business Development, CAMRADATA

March 2022

The Covid-19 pandemic has disrupted almost every industry and the insurance sector is no exception. Yet, while this broad range of companies and institutions, quick to respond to the crisis, have sustained the pressure relatively well, now is no time for congratulation and complacency.

As the economy recovers from the pandemic, many challenges remain – and new ones are coming along all the time. But there are opportunities on the horizon too and insurers must equip themselves with the right tools to spot, study and seize them.

During this period of recovery, throughout 2022 and beyond, insurers need to find a balance between higher returns on capital, lower solvency capital requirements and longer duration if they are to meet their immediate, mid-term and long-dated obligations.

Low interest rates have been a feature of the last decade, allowing insurers to move into higher-risk, higher-yielding assets. But the return of inflation – potentially not as transitory as some had predicted – is likely to see rates rise again, setting the stage for insurers to further re-risk their portfolios.

Yet, adding risk is not the only solution to generating yield and in order to get where they and their clients need them to be, casting a wider and more innovative net could be a wise investment.

New dawn

In this post-Covid environment, the insurance sector has been presented with an opportunity to be more proactive on making environmental, social and governance (ESG) a key part of their investment strategies. Among the largest global, institutional investors, few in this sector have been at the forefront of a push towards sustainability, so it is a positive sign that we saw a growing number of insurance companies beginning to address ESG in 2021.

Many have even committed to reaching net zero by 2050 – but there is work to do before then.

While initiatives have been launched on the underwriting side to stop insuring certain lines of business – namely coal and other industries considered detrimental to the environment – companies must now shift their focus to aligning the targets they have already set with their asset allocation and investment.

While underwriting may steal the headlines and most manhours in this sector, insurers need to grapple with the risk that is woven into the very fabric of the assets they need to cover a maelstrom of obligations.

The bottom line is that insurers seeking to reduce portfolio risks and generate returns can no longer afford to ignore the importance of integrating ESG criteria in their investing decision-making.

What is happening in the world around us ultimately impacts every asset and security in their portfolio. If the underwriting side of the business is changing, their portfolio should too, and they need to develop the expertise to comprehend and monitor the impact of the growing body of regulation on their portfolios.

ESG has been a talking point in the European Union for some time now. The Sustainable Finance Disclosure Regulation (SFDR), for example, governs sustainability in financial services operating across the continent. In the US market, however, ESG is really only just appearing on radars, with no real national regulations to speak of. However, Gary Gensler, the recently appointed US Securities and Exchange Commission (SEC) chairman, has stated he wants the agency to move with urgency to change this.

New opportunities

Yet, it is not all just about avoiding the risk a changing climate, society and tolerance for poor governance is creating – there is plenty of upside as well. The development of technology and innovative solutions for global issues needs short, medium and long-term capital – and insurers are well placed to both provide it and reap the return on investment it may bring.

But while insurers are exploring new investment opportunities, there are limitations on the assets and securities in which they can invest. In the EU, for example, Solvency II capital requirements can have an impact on ESG-focused investing. US insurers, however, can invest in a broader range of asset classes because they do not have to meet the same solvency requirements as their EU counterparts. Nevertheless, they must still think about factors such as duration and liability, while maintaining an ESG-focus.

Compared to sectors like private equity, which is spearheading sustainable investment in many areas, fixed income has been slow to integrate ESG. For insurers, whose main allocation is to the asset class, this could pose an issue if left unconfronted by managers and financiers.

Yet companies are now realising (and being advised) that sustainability is an important factor within a fixed income portfolio and progress is being made. Increasing numbers of asset managers are pushing forward with an ESG or sustainability agenda within their fixed income strategies, so having partners who understand the need for this is key.

Data is king

As insurers start to align their portfolios with ESG commitments and net-zero targets, data will play a vital role in conducting in-depth manager research. Specialist analytics companies provide in-depth manager research to investors to help them better understand both asset classes and managers that best align with their portfolio.

For example, CAMRADATA’s system, allows insurers to run ESG-focused reports on their existing manager or explore and compare new and different options. These reports can also collate information on a company’s background, size, strategic focus, and diversity, along with its underlying investment vehicles, fees, risk, volatility and performance track record.

Insurers – along with other institutional investors – face the challenge of a lack of standardisation around ESG data. By standardising our information gathering, we enable investors to compare a wide range of global managers, which helps them to analyse whether their current status meets their needs.

We require every manager to answer the same question on a range of ESG-related factors. These include how they approach ESG, and integrate practices into investment policies, and how well managers and analysts are trained on ESG issues. We also ask them how often they review specific portfolio ESG risk exposure.

We based these questions on research conducted with investment consultants, who worked with institutional investors to understand the types of questions they wanted answered by asset managers.

The information created then helps investors to easily find and compare ESG strategies pursued by each asset manager, their underlying ESG processes and policies and how they decide on investments and allocations. Importantly for insurers, our research also digs into an asset manager’s credit research, allowing investors to challenge any element of their process either before allocating or within the terms of a mandate.

We also invite managers to publish their stewardship reports on our platform, providing insurers with further research resources in one, accessible place.

The insurance sector has proved its stability over the ages, but now faces the challenge of proving and embracing its sustainability. With the right partner and support, we believe this transition can be a seamless one that manages risk and seizes opportunity.

CAMRADATA offers insurers a single platform to run manager research, peer group analysis and assisted searches for free. Access is available at https://www.camradata.com/gdpr-registration/

Sean Thompson
Managing Director
CAMRADATA
sean.thompson@camradata.com

Sam Buttress
Associate, Business Development
CAMRADATA
sam.buttress@camradata.com

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