Juggling E, S and G: how insurers respond to the different aspects of sustainable investment.

This article was produced by Aberdeen Standard Investments as part of their valued Industry Partnership to Insurance Investor.



Insurance Investor posted on Wednesday, September 15, 2021

In 2020, Aberdeen Standard Investments commissioned in-depth research across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland. Our aim was to investigate how insurance investors are responding to environmental, social and governance (ESG) challenges. The full report covers current practice, future objectives and the views of key decision-makers at 60 European insurance companies.

An important theme in this research was the wide range of issues covered by the term ESG – and the different approaches insurers take to them. Currently, the focus is squarely on the environment rather than on social or governance issues. The Covid-19 pandemic may be starting to change this, however.

Four approaches to ESG

Insurance companies’ sustainable investment practices fall into four broad categories. The first of these is exclusion – systematically excluding companies based on their sector, behaviour or country of operation.

The second is ESG integration – systematically considering ESG factors in investment decisions. This ranges from best-in-class strategies and the use of minimum ESG scores to the integration of non-financial data into valuation models.

The third category is stewardship (sometimes called active engagement). This covers voting policies and dialogue with investee companies on sustainability issues.

The final category is impact and thematic investing. This is the selection of investment products that seek either to generate a positive social or environmental impact or exposure to themes likely to benefit from sustainable investment trends.

The nebulous nature of ESG

Although the majority of our respondents (61%) consider ESG as a single factor, nearly all recognise the limitations of this sweeping approach. Respondents overwhelmingly agree that ESG is nebulous because it seeks to address such diverse concepts.

Those respondents that treat ESG as a single factor are mainly smaller firms early in their sustainable investment journey. A single-factor approach usually entails using third-party rating agencies and the scores they attribute to companies. Some insurers see these scores as offering a holistic understanding of a firm’s ESG quality, thus avoiding the need for in-depth research.

Meanwhile, those that prefer to focus on individual ESG sub-factors are usually larger insurance companies with established ESG policies and dedicated research analysts.

These differing perspectives influence the ESG practices that insurers favour. For example, exclusions and stewardship generally hinge on specific topics rather than overall ESG scores. ‘Impact’ investment products, meanwhile, typically seek to contribute to one or several of the United Nations’ Sustainable Development Goals.

Integration is perhaps the one investment practice in which overall scores can be used. However, many insurance companies still prefer to assess companies on their underlying ESG characteristics rather than through all-encompassing scores.

A focus on the environment

Fully half of our respondents see the environment as the most important ESG factor. The dominance of environmental concerns is driven by regulation and by the fact that environmental impacts are quantifiable. A French life insurer put it like this: “We have an ESG policy that covers all subjects, but in reality, most of our efforts are around climate change. Everything points in that direction, particularly regulation.”

To address environmental concerns, our respondents make use of all sustainable investment practices, from exclusions to impact investments. Exclusions form the backbone of insurers’ climate action, with 54% excluding some or all coal-related activities.

Exclusions have inherent limitations, however, particularly for passive investors who seek to minimise their tracking error. “We cannot simply decide to exclude 5% or 10% of our investment universe,” a Swiss life insurer told us.

Most investors combine exclusions and stewardship. When engagement does not yield results, insurance companies can use exclusions as a last resort.

The prime example of ESG integration is the use of environmental factors, particularly carbon footprints, as inputs to fundamental analysis. These integration practices allow environmental concerns to be addressed through a more nuanced approach than exclusions, for example strategic asset allocation.

Through impact and thematic investments, insurers seek to provide capital to climate-related solutions such as renewable-energy infrastructure, energy-efficient real estate and climate-focused listed products. Although these investments remain marginal, they are the fastest-growing segment in the ESG landscape.

While climate change remains the clear focus, some insurers are seeking to extend their environmental policies to cover biodiversity and plastic pollution.

Social: attention focused by the pandemic

Few respondents (13%) specifically focus on the ‘S’ in ESG. Diversity is the most common individual component of social analysis, most frequently through insurance companies' encouragement of board diversity through voting policies.

Few insurers have a clear view as to how diversity could influence their investment strategy, however. Nonetheless, some recognise nascent initiatives such as gender-equality indices and funds.

There is also a growing emphasis on diversity at insurers’ asset managers, with 6% of respondents now including diversity criteria in RFPs for new investment mandates. This figure is likely to increase in the years ahead.

Beyond diversity, the current pandemic has revived interest in the social components of ESG. Health, wellbeing and employee support have become central talking points in recent months. Meanwhile, some impact-investment initiatives have sought to address the pandemic’s economic aftermath. But while the pandemic has buoyed interest in the ‘S’ in ESG, insurers have yet to reach a consensus on what indicators matter most and how to incorporate them in their investment strategies.


Historically, fundamental analysis has covered corporate governance, so its consideration predates ESG. Consequently, many investors consider governance issues outside of a holistic ESG framework.

Governance concerns are often addressed through shareholder engagement and voting policies. However, few insurance companies have identified the ‘G’ in ESG as a central focus. This limits the development of specific investment practices linked to the subject. According to one Swiss life insurer, “It is difficult to imagine investing in a ‘governance’ impact fund”.

All in all, the survey highlights the difficulties insurers have in making progress on other aspects of ESG beyond the climate crisis. This creates an opportunity for asset managers to innovate to help their insurance clients cope with this conundrum.

You can read our full insurance-survey report here