Case study: How Pool Re has integrated ESG into its investment portfolio
Ian Coulman, Chief Investment Officer at Pool Re shares how the organisation is looking at ESG investments and the steps it is taking to consider climate within its portfolios.
Insurance Investorposted on Monday, September 28, 2020
Insurance Investor: How can (or why should) insurers integrate sustainability principles (ESG) when considering their wide roles as risk managers and investors?
Ian: The overriding principle in terms of how insurers can integrate it is engagement.
Whether you are managing money in-house as an internal manager or outsourcing portions of that, it is incumbent on you to ensure that your investment managers are engaging with all of the companies that they invest in, whether it be from an equity perspective as a shareholder or as a debt holder.
There is greater power amongst insurance companies to engage and bring about change as significant debt holders of these companies.
"It is incumbent on you to ensure that your investment managers are engaging with all of the companies that they invest in"
If, hypothetically, a company that doesn’t score very well on its ESG factors is looking to issue 10-year debt at a spread of say 100 basis points over treasuries, you could directly influence their borrowing costs and thereby their approach to ESG by only considering investing in their debt instruments at a spread of 120 basis points over treasuries.
You are then engaging with them and encouraging them to bring about change that clearly has a significant impact on their borrowing costs.
Engagement is significant and it is incumbent on us as asset owners to ensure that our investment managers are doing the right thing and engaging with those companies about this change.
"If we don’t look at a lower carbon footprint and reduce rising temperatures, we are going to have problems in the future"
We should be doing this simply because it is the right thing to do. The science shows that there will be problems if we just carry on the same path. Trillions of pounds could be wiped off the value of assets if we continue down this path of global warming.
If we don’t look at a lower carbon footprint and reduce rising temperatures, we are going to have problems in the future, and it will have a significant impact on the value of investment portfolios let alone that we need to ensure a sustainable future for future generations.
Insurance Investor: As insurers, naturally climate change has an immediate impact on your industry, can you describe how you are considering climate within your investment portfolios.
Ian: Pool Re is a slightly different animal to traditional reinsurance companies, given that we only cover UK commercial property against terrorism damage.
There are certain aspects about climate change that could have a link to terrorism. Research has shown that climate change and rising temperatures in certain areas of the world creates migration issues.
We have seen this issue in the past couple of years with migrants being displaced in areas in Africa and the Middle East, which are known to have an element of terrorism risk.
"There are certain aspects about climate change that could have a link to terrorism."
Most asylum seekers are genuine and are seeking asylum and safety from persecution, but within this element there is the potential for terrorists to escape through this network.
We then have to look at this and see what we can do to help mitigate this type of risk. This may be investing in companies who are trying to mitigate against these issues to try and protect the UK.
For instance, we have committed up to 1% of our assets to invest with venture capital managers who are developing technology and products, such as facial recognition or CCTV, that will help reduce these kinds of risks.
"From an investment point of view there is more that we can do to help"
Other ideas we are considering are around whether we can invest in some of the regions that are experiencing displacements to help reduce the threat of that migration.
This might be around investing in companies that may help to offset our carbon footprint by putting in place the right kind of technology and equipment to ensure that those regions that are at risk have basic needs met such as water and sanitation, which will help to reduce the risk of this migration.
From an investment point of view there is more that we can do to help and be a bit more proactive rather than reactive and use the assets that we have to help bring about some of these changes.
This excerpt is from: Asset Management for European Insurers - A bespoke Report with Wells Fargo Asset Management. You can download the full report at https://www.clearpathanalysis.com/reports/insurance-asset-management-bespoke-report-wells-fargo-asset-management