Risk management is main driver of ESG amongst UK insurers
According to recent European insurance research commissioned by Aberdeen Standard Investments (ASI), 87 per cent of UK insurers believe that risk management is the main driver of their environmental, social and governance (ESG) practices, whilst only 27 per cent currently see ESG as a business or investment opportunity.
Other drivers include regulation (60 per cent UK respondents), stakeholder management (67 per cent UK respondents) and values and ethics (60 per cent UK respondents).
It was found that asset-liability management, the search for yield in a low-yield environment and solvency-capital requirements are all regarded as more important factors than ESG in defining insurance companies’ investment strategies. It also unveiled that ESG is rarely seen as a driver in its own right and is most often considered an input into the investment strategy rather than its defining factor.
ASI partnered with strategy advisors, INDEFI, to interview 60 insurance companies across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland – covering 42 per cent of the total European insurance market. The purpose of the research was to identify how insurance investors are responding to ESG challenges.
The research also identified that depending on the type of insurer, their regard for ESG is varied. For example, life insurance companies that are long-term investors see ESG as a risk factor over a value creator because the long-term risks of ESG challenges pose significant risks to them. Property & Casualty (P&C) insurers on the other hand have shorter investment horizons and invest mainly in highly liquid asset classes, so feel ESG factors are less significant.
Some 73 per cent of UK life-insurance companies also highlighted stakeholder pressure as a key motivation to develop sustainable practices and offer new products to demanding clients. In comparison, P&C insurers and reinsurance companies were less exposed to this pressure.
Aileen Mathieson, Global Head of Insurance at Aberdeen Standard Investments, says: “Sustainable investment in the UK has predominantly been driven by pension institutions, particularly local-government pension schemes and foundations/religious institutions, giving the UK the longest history of ethical investing. However, large insurance companies are now focusing significantly on this as a result of increased regulatory pressure, demand from their customer base and also corporate commitments to Net Zero targets as well as a willingness to devote capital towards post Covid-19 recovery themes.
“As this pressure continues to rise in the UK, it will encourage all insurance firms to pursue their sustainable investment journey. Some are already beginning to recognise the opportunity to build a competitive edge through sustainable products. This has led to a wave of innovation: from ESG model portfolios offering clients unit-linked solutions entirely composed of ESG-themed products to thematic or impact products that speak to clients’ desire to generate positive impact from their savings. Private market and illiquid credit investments are emerging as particularly suited to insurers’ investment strategies.”
Furthermore, the research highlights that amongst most insurers, the expectations of asset managers are increasing. Today, most sustainable investment policies already extend to outsourced assets (81 per cent of European respondents), and ESG criteria are increasingly included in RFPs (35 per cent of European respondents).
More so than in other European markets, UK respondents, particularly smaller insurance companies, highlighted that they will rely heavily on their asset managers’ expertise and services to stay up to speed with regulatory and market evolutions. In particular, they are looking to their asset managers to address two key challenges: effectively managing risks and contributing to solutions.
Mathieson adds: “It’s crucial for us as insurance asset managers to have a coherent house view on our sustainable practices and demonstrate to insurers how this is integrated and measured within our investment processes. Our actions go beyond the publication of ESG policies and reporting as we help our clients navigate and understand extra-financial risks — particularly regarding climate change — and how to contribute to sustainable objectives through their investments.
“Our ESG analysts work alongside our fund managers to exploit ESG data to improve risk management, ensuring our clients’ solutions are resilient and sustainably fit for the long-term. Most notably, we are seeing some consideration of a shift to climate benchmarks or the inclusion of more specific ESG related mandates in our clients’ equity and fixed-income mandates. We are also seeing an increase in the interest of private ‘impact’ assets and innovative listed instruments such as green bonds, as we integrate country ESG analysis into our government bond strategies. This demonstrates that we are aligned with our clients in our approach as we work together with them to co-construct ESG and impact investment solutions.”