#IINc 2021: Sustainable Investing for Insurance Companies At a Time of Massive Change by Roger Urwin

Sustainability is a slow moving but unstoppable train and it has just started to pick up pace at the back of COVID-19, Climate change and Social Change. Insurance companies are huge players in financial markets and therefore recipients and impactors of these changes.

Insurance companies are not only asset managers but also asset owners and they are also amongst the most powerful and scrutinised investors in world. For example, Aviva, Metlife, Nippon, LIC are some of the biggest Insurance companies by AUM. With great power comes great responsibility especially with regards to sustainable investing. Insurance companies are special types of investors with emphasis on Accounting, Insolvency and Regulatory risks.

Below are some critical issues for Asset Managers and Asset Owners –

4 main drivers of vision and strategy of an organization-

• Sustainability is becoming embedded across the industry, fast-tracked by COVID-19 environment
• Power of people. Insurance companies are mainly intellectual capital
• Investment models (smarter ideas)
• Regulation and Reputation

For the transitions ahead, there are 4 key areas or steps-

• Organisational transitions
• Sustainability transitions
• Mandate transitions
• Data/Technology Platforms

Out of these, sustainability presents itself as the most significant. It is critical to the future and a factor for all investors.

Evolving landscape for institutional Investors with respect to sustainability and ESG –

• Sustainability is presenting big investment issues for all investors in what to do and how to do it. Factors here include regulatory guidance, how ultimate end-investors’ wishes can be explored and the ‘fiduciary window’ norm
• New ESG thinking and data is coming but it’s not yet working smoothly. Factors here are development of ESG data and tools; ESG indexes; new sustainability standards (like TCFD), systems thinking
• Investment models are set for big disruption from ESG and sustainability. Factors here include long horizon investing; ESG factors; Climate change risk and impact investing

Evolving landscape for institutional investors in the moves to a 3D investment framework –

• Applying systems-theory
  • The ecosystem has many moving parts
  • Everything connects, nothing adds up
  • Data is messy
  • Collaboration is critical
  • Behaviours and incentives matter
  • Associations not causations
• The net-zero economy purpose and mission
• The finance and climate outcomes ‘bridge’

Roadmaps for insurance companies reflecting stronger purpose

Purpose

• Purpose = why we exist, whom we serve, what outcomes we seek, how things connect
• Positive purpose reflects ambition and vision
• Purpose drives motivation, energy, resources and focus and ultimately the value created – it is a superpower

Commitment

• Commitment to multi-stakeholders: Recognising the challenges of co-dependence and the opportunities in solidarity
• Commitment to net-zero policies: Recognising the necessity of sustainable actions and a just transition to a net-zero economy
• Commitment to great performance: Recognising that enablers have to be in place to deliver the excellence and accountabilities needed
• Commitment to our people: Recognising the need to build a diverse array of talent treating our people as our greatest asset

CFA Institute Future of Finance Project towards investing in the new financial order –

• Financial services is a broken spoke in the economic wheel – bandaging it has cost billions of dollars
• The current discussion about fixing finance is tired
• The problem summart is of the investment industry struggling with its purpose
• The CFA institue journal involves
  • Authoritatively describing the financial ecosystem
  • Finding some solutions covering the issues of industry sustainability, effectiveness and adaptability: structure, alignment, ethics, competency and trust
  • Living up to a new mission

Q&A –

When we talk about asset owners – who are the most sophisticated players?

Larger players are more sophisticated. Therefore, Insurance Companies and Sovereign Wealth Funds are some of the most influential. Insurance companies might be the most influential in sustainable investing.

For Sustainable Investing, risk premia are increasing. How do we improve the return profile?

The additional factor of constraining the investment choices might be leading to increase in risk premia in sustainable investing. However, more competition and creative solutions are needed to do things better and have a win-win situation.

Out of the 4 key areas of transition towards sustainable investing, which one is most significant?

Organisational level and Sustainability level transitions are both important. Organisational transition is easier than sustainability transition given the complexity with sustainable investing and hence investors will need to spend significant time on the same.

In the past, we have gone through brief periods of focus on sustainability and environment-related goals which couldn’t be followed through. Do you think the current goals will get pushed further into the future?

Earlier, say around 10-15 years ago, Capitalism and Sustainability were considered as competing ideas, i.e. you have to sacrifice one for the other. In the present time, this thinking has fundamentally changed driven mainly by COVID pandemic and Climate Change. So, although, there might still be moments when we lose long-term perspective or explore alternative focus areas, the fundamental landscape has changed.

Why some companies already have net zero goals/commitments while others haven’t made much progress in this area?

Organisation are struggling towards joining all the dots when it comes to net-zero commitment and sustainable investing. Those who take more public positions, want to take into consideration all stakeholders and not just shareholders, and are exposed to reputational risks are more keen to have net-zero goals.

Transition capital needed to move to a greener economy or have completely green capital might be impacted due to falling fixed-income yields. Accordingly, Insurance asset allocations are moving away from fixed income assets. Do you think this has an impact on transition capital?

We need more dynamism in exploring and allocating capital in line with sustainability goals. New areas and creative approaches are needed to have asset classes which serve both risk-return and sustainability objectives.

Any advise for young professionals looking to enter this industry?

They must focus on sustainability skills. Demand for professionals with such skills is set to grow in next 5-10 years. CFA institute certificate in ESG is a useful course to pursue.