How regulation is driving ESG investment strategy
Tim Walker, Group Chief Risk Officer, at Catalina Re examines how regulatory requirements affect ESG investment strategy and how insurers should consider climate within portfolios
Insurance Investorposted on Tuesday, June 30, 2020
Insurance Investor: How are the regulatory requirements affecting your strategy on ESG and climate change?
Tim Walker: When I think about regulatory requirements and look at the universe of different regulators around the world, with Catalina Re itself engaged with five different regulators in mature insurance markets, the Prudential Regulation Authority (PRA) is the only one who, to this point, has come out with a very strong statement of principles with regards to how banks and insurers should run their businesses both from a strategic and practical nature.
So, I will frame my comments in these terms because of the regulatory steering that is forthcoming in the UK.
"A lot of what we are doing is still aspirational and driven mainly by the owners and boards of the companies"
Here our strategy has been along the lines of the principles of measuring, monitoring and controlling our exposures to climate change and adding ESG principles into risk selection within the investment portfolio.
In this respect, given that it is still the case that there are no strict climate change reporting rules in place, a lot of what we are doing is still aspirational and driven mainly by the owners and boards of the companies to ensure that the principles set forth are achieved.
This is currently very much around monitoring, measuring and trying to control those risks.
Insurance Investor: How can (or why should) insurers integrate sustainability principles (ESG) when considering their wide roles as risk managers and investors?
Tim: Speaking principally as a risk manager, one of the most important things is that ‘you can’t manage what you can’t measure’.
The reporting elements around ESG are going to therefore be crucial in promulgating a future where insurers and banks can lend credit or provide services to investors.
By this I mean that sustainability principles have been around for a very long time and certainly the insurance industry has been talking about corporate social responsibility (CSR) and ESG ideas for well over 20 years.
"One of the most important things is that ‘you can’t manage what you can’t measure’."
Most insurance companies probably have had some degree of ethical investment in their portfolios but 20 years ago the depth of information that would allow them to make those decisions was relatively minimal and required very specialists expert asset managers in this space to find the companies who may well conform to the principles but who may not have been able to report that in any meaningful way.
Now, we are in a position where there is much more reporting on issues like carbon footprints, water usage and general engagement with social issues and policy and so this reporting at least gives you a wider universe of potential credits to invest in.
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.
Tim: As someone who has worked in property catastrophe for a good chunk of my career, the overall observation is that over the last 20 years or so insurers have been increasingly interested in research which would indicate that there is an impact on their business, primarily on the property liabilities and physical assets side.
At the same time, they have been very slow to see how they can influence climate change through the areas that they can control, which are primarily the provision of credit and investment strategies.
The incremental nature of climate change and the wide variety of opinions both scientific and conjectural on this topic has generally made insurers wary of committing excessively to those industries which promote climate change mitigation or those who are primarily responsible for exacerbating it.
"Insurers have been increasingly interested in research which would indicate that there is an impact on their business, primarily on the property liabilities and physical assets side"
That being said, there have been a number of thought leaders in the industry who have committed to removing carbon intensive industries from their portfolio and we have seen this really taking off over the past couple of years in a way that I haven’t seen in the past.
This is very encouraging just in terms of the need to transition to a low-carbon economy. Investment managers are beginning to think seriously about it and more so than at any time in the past two decades.
Overall, the ground swell of opinion on this has fundamentally changed and the interesting thing about this is the huge amount of assets that the insurance industry has at its disposal and its ability to invest.
"There have been a number of thought leaders in the industry who have committed to removing carbon intensive industries from their portfolio"
Therefore, their opinion really does count, and it will become problematic for industries in the future, particularly those that are heavily involved with fossil fuels or heavily carbon or water intensive in their production processes.
Catalina/Apollo and many other companies are now folding in an element of background due diligence on new investments as to whether there will be a future for these credits and whether those companies will still be around in 5-10 years as a result of climate change, either reducing or destroying their returns entirely.
Insurance Investor: Regulators have encouraged insurers to demonstrate ESG consideration within your portfolios. How are you approaching reporting on ESG?
Tim: There is an element of due diligence in any new credits that we invest in and so the idea of ethical investing and ensuring that we only invest in these companies that fulfil our ethical investing criteria are then promulgated up to that decision-making forearms such as our investment committee.
This is the primary reporting that we do at this stage.
Insurance Investor: What is next as we evolve beyond ESG integration within the investment portfolio?
Tim: My hope and wish is that ESG will cease to be a significant, standalone topic in its own right, simply because we reach a level playing field when it comes to ESG issues.
It would just be one of the standard due diligence items that an asset or investment manager would complete on behalf of their clients.
This excerpt is from: Asset Management for European Insurers - A bespoke Report with Wells Fargo Asset Management. You can download the full report https://www.clearpathanalysis.com/reports/insurance-asset-management-bespoke-report-wells-fargo-asset-management