Insurers are on a sustainable investment journey. But who’s driving, why are they taking this journey and what are the main attractions? Our 2020 survey results and C-suite interviews offer answers and insights that highlight some common themes and interesting differences.
Who’s in the driver’s seat?
Companies at the forefront of the change tell a similar story: many years ago, someone somewhere in the organisation was convinced ESG was important. The conviction might have been born out of personal beliefs and values or because (s)he had the vision to see ESG emerge as the hot topic it is today. These individuals over time convinced senior management and pushed for cultural change within the organisation. Many of them have become their firms’ ambassadors and spokespeople on sustainability.
Today, CEOs have primary responsibility for insurers’ sustainability strategies, according to over one-third of survey responses. However, the other two-thirds of the responses reflected the reality that sustainability strategies are being managed by a wide variety of corporate leaders—from dedicated sustainability teams to other C-level executives, such as CIOs, CFOs or CROs.
Why take the road to sustainability?
The twin considerations of reputation and regulation are the main reasons that insurers are going down the ESG path.
ESG relates to risks linked to things like health and natural catastrophe, meaning that the insurance industry must inherently consider environmental and social issues. Accordingly, most survey respondents cited alignment with company policy as the main driver for their firm’s sustainability strategy. Considerations around reputation and the economic impact on investments came in second.
And while local regulation did not rank as highly in the survey as a driver of a sustainable investment strategy, interviews with CIOs in the UK, France, Germany and Hong Kong all confirmed that regulation was indeed the main force behind their efforts.
Interestingly, most CIOs also agreed that shareholders and clients were not the main drivers of developing ESG investment programs, though this might be changing in the new unit-linked businesses where clients may be more focused on what their investments are funding.
What are the main attractions: E, S or G?
Our survey found that while environmental issues captured the most attention, many participants have a keen interest in increasing the focus on social and governance issues.
In recent years, ‘non-financial’ initiatives by firms have been heavily geared towards tackling environmental issues, particularly climate change. This is in part due to the expectation that regulatory intervention will primarily affect environmental considerations. Therefore, it is hardly a surprise that identifying risk for climate change across all investment portfolios ranked as the top focus among survey participants.
But the Covid-19 pandemic shows the shifting focus toward social issues: in the first half of 2020, social bonds accounted for approximately 50% of all specific ‘use of proceeds’ issuance, a significant change from 2019 ($17.3bn) when green bonds dominated issuance ($220.6bn).
Indeed, a number of interviewees consider social and governance considerations as important, if not more so, than environmental ones. One Asian CIO believes governance is an extremely powerful predictor for long-term risk-adjusted returns, while a European CIO believes that in a well-run company, environmental and social considerations are already part of good governance.
And yet, some of the differences in focus may have a regional influence. A CIO in the US feels that social and governance issues are already top of mind—but that people haven’t thought about climate change in a serious manner. That is starting to change.