Encouraging insurance companies to invest in a sustainable fashion was the theme of one of the main presentations at day three of the Rendez-Vous de Septembre in Monte-Carlo yesterday. Schroders global head of stewardship Jessica Ground offered both carrot and stick to insurance investors with the message that they must 'be engaged' in their efforts to invest sustainably.
The main thrust of the sustainable investing pitch focuses on consideration of environmental, social and governance (ESG) issues and in attempting to embed such ESG considerations into their investment processes. Since insurance companies are generally considered long-term investors, this focus on future sustainability is particularly important.
According to Ms Ground, the insurance industry is waking up to sustainable or responsible investing and said that it had moved from being a niche area for them to one that is rapidly gaining traction amongst a wide range of institutional investors. Schroders’ research suggest that over 90 of the world’s 100 largest investment managers have committed to incorporating ESG considerations into their investment decisions, ownership and reporting by becoming signatories to the Principles of Responsible Investment, a UN-backed initiative.
At its most basic ESG investing looks to understand the quality, growth and sustainability of a business when it is being considered for a portfolio. Because of the nature of insurance funds as long-term investors, it is important to understand a company’s prospects as an investment over the long term – and therefore how the target company engages with the real world is far more important than focusing on short-term quarterly results.
Ms Ground also stressed that taking account of emerging trends such as climate change does not automatically mean compromising shorter-term performance.
The overall message is that if an insurance business is considering any form of sustainability factors on the underwriting side of its business, then it should also factor the same thinking into its investment strategy – although Ms Ground was realistic enough to acknowledge that this is a new way of thinking that is only now appearing on the radar screens of most asset managers within insurance entities.
“Quite rightly for insurance investment there has been a lot of emphasis on asset and liability matching, on solvency, on low rates and these have been huge headwinds to deal with on the investment side,” said Ms Ground. “You can’t underestimate the significance of those. But it is really only recently that we have started to think about these future risks.”
“Insurers haven’t had much bandwidth to think about these things and they are only really just starting to do so. It is still very early days.”
Schroders is hoping that it can help insurers along the path to understanding the need for a sustainable element in their portfolio. “The first step is to realise that you probably need to think about this as a risk, as you think about other risks, and realise that it is not being captured,” she said.