Nick Hankin: We did a lot of research in terms of our organisation’s purpose - why we exist beyond getting financial return for our investors - and concluded that our purpose is about enabling a resilient future.
As part of that, we have a sustainability strategy that is focused on an orderly and inclusive transition to net zero. It's also about partnering for social growth through innovative, and sustainable solutions. That's where a strategy like Premiums4Good (P4G) becomes a part of our investment and business strategy.
In general, ESG is an important topic because of community initiatives and how it impacts our business. Looking at climate change, for example, we understood how it impacted our physical risks, but we weren’t sure how it impacted our clients as they transition to net zero, so we needed to investigate that.
As an industry, we've made some significant commitments around things like net zero – both on the asset owner side and the insurance side but insurers don’t operate in a vacuum. Our suppliers, our customers, and our reinsurers are active in ESG. They want to understand our plans and how they can allocate their capacity to cedents, our brokers, and our investors.
Nick: We're looking to find companies and organisations that are generating social, and environmental good – as well as providing a financial return and this is part of our investment strategy. We are directing capital to areas like renewable energy, waste management, water conservation, homelessness, and social care.
Insurers are systemically important investors, and Premiums4Good was innovative in the sense that it looked to take a portion of our customers’ premiums and make investments that help create real-world social and environmental impact.
Insurers have this time lag between the premiums that we take in and the claims that we have to pay, and we're looking to make a financial return on those investments to support our profitability.
Nick: One of the challenges is joining up the underwriting side of the business with the investment side of the business. Historically, they've tended to run separately because the underwriters have been doing the risk assessment and have been driving the business with renewals, looking at their portfolio. Then the asset management side of the business looks to maximise the return on the underwriting premiums. It’s an internal challenge that organisations have to grapple with.
"There’s a risk that [ESG] is seen as something separate from the business
strategy and should be done only by sustainability teams."
The second challenge that I've observed across the industry is learning how to best think about ESG and sustainability. There’s a risk that it's seen as something separate from the business strategy and should be done only by sustainability teams – or solely as part of your corporate social responsibility. We have done a lot of work to integrate ESG into our business strategy and business processes and to make sure the whole organisation knows that ESG is everyone's job.
We look at the environmental, social, and governance elements and we ensure that everyone on the executive team has accountability and understands their part of delivering the strategy – and that they have their teams aligned while doing it.
Nick: Effective insurers succeed by reflecting the societies they operate in and the companies that work. We're a specialist commercial insurer, and we must ensure that we understand how sectors are changing.
When we looked at this perspective, yes, we saw the list of increasing frequency/severity catastrophe events, and we saw the risk of stranded assets as long as those sectors transition. We also saw the potential risk of liabilities if management teams don't respond appropriately to ESG topics.
"We’re trying to find something to differentiate us as
a business."
Everything has opportunities too. We have a sustainable energy business, which is set up to understand the different underwriting metrics related to new technologies. Impact investing is something that's a different proposition that we can take to market.
When we think about new product launches or new growth areas, we think about how ESG and sustained impact investing play a part in what we're bringing to customers. We’re trying to find something to differentiate us as a business rather than being a commodity provider; insurers, reinsurers, and asset managers have a huge part to play in this transition.
Nick: The transition to net zero and energy security. This is the decade of significant change in transition, and this is going to be around social change and geopolitics.
We will need to be agile to understand some geopolitical changes supply chain changes, the energy transition changes, and also the way that the prominence of ethics/trust/purpose come into the expectations.
Another trend will be the political risk around ESG sustainability. There will be continued debate to understand how it evolves in a changing climate landscape, which will also be different in separate jurisdictions.
Nick: For P4G, a practical pain point is finding sufficient investments. We currently have impact investments of $1.6 billion, but we're thoughtful about those investments and they have to stand up to scrutiny. They have to do what our intention is in terms of having a real-world impact and therefore, our investment team have got an ongoing challenge. An ongoing challenge has been finding the ones that meet sufficient positive impact criteria and provide an attractive risk adjusted return. That's, at the moment, a limiting factor for going further and faster.
You then have operational challenges as a pain point because you have to translate something that you want to do at a senior level and make it real. That involves connecting ambassadors in our business with people who are running businesses that are there to translate what we're doing on impact investing into the processes in the business. That comes down to systems and data and the way you think about it.
We've been talking to customers about impact investing, and we've had a certain proportion of premium to impact investing. We're also taking the customer segment and opting into impact investing and we tried different things operationally to make it work at scale.
The final point is to drive holistic thinking about the purpose of the business, what its strategy is, and what the customer strategy is. Profit is a component of what we're here to do, but it's not the only thing, and trying to embed that into your culture is both an opportunity and a challenge.
Nick: The simplest thing was moving it away from being a risk issue, or a sustainability issue, and bringing the concept into the CEO and the business leaders’ role.
"If you're the CIO you're looking at it from a bigger point of view, such as with the
board’s point of view of governance point and from a risk point of view."
You’ll start seeing see the commerciality of it, not the management aspect of it. I understand that if you're the Chief Investment Officer you're looking at it from a bigger point of view, such as with the board’s point of view of governance point and from a risk point of view. They're all important parts of ESG sustainability, but they still miss what it means for customers. What does it mean for partners? What does this mean for your business planning and your P&L performance?
Those aspects need to be integrated into the day-to-day.
Nick: It’s the premise that you can still deliver attractive risk-adjusted returns or business value, but you can also deliver positive social and environmental impact. It's not a trade-off between the financial objectives or the investment part of our strategy with what we can do around delivering our purpose and delivering positive outcomes in societies. Because of the pandemic, it’s probably become even more critical.
The initiative is there to leverage the investment power the insurers have. Think of it in a broader sustainability context rather than a standard investment thesis.
