Asset managers can be important strategic partners to insurers, providing a wealth of practical ESG insights, from research to implementation, as well as engaging with companies on behalf of their clients. Here’s a look at what ESG services insurers say they really value from their asset managers.
No longer off the beaten path
One of the surest indicators that ESG is going mainstream is that insurers will no longer consider third-party asset managers that do not take ESG criteria into considerations, or at least have some sort of statement about it in their investment policies. Most expect not only ESG-specific outsourcing mandates to increase in number, but also for the ESG credentials of third-party asset managers to become more important in their selection process. That being said, performance and financial risk management will still be the two most important criteria when selecting an asset manager.
Illuminate the way
Insurers want more specific and clear statements on how ESG criteria are integrated into third-party asset managers’ processes. Many complain of too much marketing material and “greenwashing” and feel that what lies beneath is like a “blackbox”. Insurers would also like more visibility into the motivations in the securities selection process: is it ESG or performance driven? And what weight is given to ESG criteria? At the moment, many insurers don’t feel they receive enough detail on arbitration between ESG and non-ESG securities, as well as an understanding of the trade-offs. For example, which is the better investment: the lower-valued or higher-yielding security that might be seen as a candidate for ESG improvement, versus a more expensive security with a higher ESG rating currently?
Articulating trade-offs is also important for insurers based or invested in emerging markets, especially Asia, where insurers are keen to divest from some problematic sectors but cannot do it too quickly.
Indeed, many insurers recognise ESG as a work-in-progress for themselves and third-party asset managers. As such they are also keen to understand what the current shortcomings of asset managers are, with respect to ESG, and what their plans are to address these issues in the next two years.
E for engagement — and focus on G
Insurers believe asset managers should be agents of change, and that beyond channeling capital towards
ESG-friendly companies or assets, managers should be engaging with businesses to bring about change in processes, operations and outputs. Insurance CIOs believe large asset managers have more power and resources to engage with companies than asset owners – and to make a stand if those companies are unresponsive.
While it is often a given that equity asset managers engage with company managements, insurers believe that credit managers may have more power when engaging because they can demand higher spreads from companies scoring poorly on ESG, directly impacting their ability to borrow and ultimately hitting their bottom line.
Follow-up from engagement is also important. CIOs want to hear the success stories as well as the not-so-successful ones. Asset owners see the ability to get regular progress updates with a certain level of granularity as a massive plus.
Insurers would also like to see their managers step up their activities regarding governance. This would drive greater sustainable outcomes and yield better investment returns. Indeed, a key driver of sustainability strategies is economic impact on investments, and governance is perceived as a good indicator of risk-adjusted returns.
Ratings not required
The specialised expertise for ESG ratings is concentrated amongst a few players. Most investors use MSCI and Sustainalytics, though some insurers also use ISS and Vigeo Eiris, which is majority-owned by Moody’s. Some don’t use ratings agencies at all either due to the perceived high cost for a nascent industry lacking in transparency or because insurers have decided to build in-house scoring systems.
The biggest challenge of ratings is the availability and quality of data that inform the scoring. A lack of consistency across providers and some gaps in coverage make it less attractive to insurers with global investments. The issue of how to score companies that had a previous scandal or are on the path to improvement also means that ratings can be flawed.
Still, some insurers use ratings as part of a minimum requirement check and then blend the rating into their own in-house analysis, similar to the way a credit analyst might use a credit rating.