Aileen Mathieson: The challenges are practical. Getting consistent availability and uniformity of data across asset classes and asset managers presents a challenge for the in-house investment team especially if a multi-manager outsourced approach is in place.
There has been progress in developing taxonomies, which are not more globally aligned, with regards to the definitions.
However, this vagueness can be problematic when managing investments over a variety of geographic areas for existing portfolios and investment sales that were made some years ago. This means a review of ESG factors on these deals must be done to establish salvage the baseline, which can take considerable time and effort.
"For P&C insurers the investment time horizons also tend to
be shorter than life insurers."
Also, the nature of the particular investment portfolio characteristics, such as risk and return aspects and also liability matching considerations of the established portfolios can result in some challenges to pivot toward ESG focused strategies. This is particularly relevant if there is a values-based decision to be made, as some insurers may focus more on social outcomes over overall financial return.
For example, buy-and-hold portfolios are set up to match cash flows. If you wanted to pivot these toward portfolios that you have established some time ago but now want to change those or adapt them to have a more ESG-focused outcome, then that could result in restructuring of the portfolios and financial impacts which hadn’t been anticipated at the time.
For P&C insurers the investment time horizons also tend to be shorter than life insurers. That has led it to be more challenging to find meaningful ESG strategies in the past. The situation is improving in terms of opportunity and P&C insurers have more ESG focused strategies in equities and the alternative asset classes in particular than in the past.
Aileen: The breadth of opportunities is greater now. More of the asset management industry is generating ESG focused strategies than in the past.
It is a case of market supply and availability of strategies, which are more short-term focused. In the past, people focused primarily in terms of infrastructure data and infrastructure equity, which tend to be in the long term. It didn’t fit with a shorter duration book.
Aileen: Yes, P&C insurers tend to have five-to-ten-year cycles, whereas life insurers with the big annuity books and pension funds where individuals are investing for 20-30 years.
Aileen: The implications of sector-wide exclusions have to be considered from the perspective of impact on the subsequent investable universe. For example, if you knock out oil and gas, that takes a big chunk of some of the indices out of contention for investment and eliminates opportunities to invest positively for transition.
"Excluding a sector as a result of the absolute level of carbon
emissions has several impacts."
This is why individual security selection process is key. Whether it is achieved by way of screening exclusion or bottom- up security selection, it is imperative for the asset managers and also the benchmark providers to articulate to the clients both how these approaches are developed, applied, and maintained and how the resulting impacts are assessed and monitored. There is so much variety in index providers and how they are used by asset management that it is incumbent upon those individuals to explain to the clients how to do it to evolve processes as time goes on.
In terms of unintended consequences, excluding a complete sector as a result of the absolute level of carbon emissions, or percentage of revenues, has several impacts: it removes the opportunity for the investor to contribute to positively driving change in those sectors because, I believe, if you are not invested you don’t have real influence.
There can also be material impacts both upstream and downstream on the value chain. This means that you could have suppliers to oil and gas that might be having a positive impact on local employment. But if you suddenly withdraw investment from a sector quickly, without giving those participants a chance to replace those revenues, there could be significant secondary impacts from that.
Aileen: We would favour engagement over divestment where we can. All our investment strategies are actively managed, and as such, we expect asset managers to be actively engaged in ESG related matters. We recently introduced monitoring in engagement with the companies.
At Aspen e are at an early stage of deeply integrating this into our investment approach. We would like to expand, over time, to having more visibility of both the voting decisions and also the level of direct engagement outside of voting beyond the AGM.
"As longer horizon investors, [we] can monitor the delivery
against a company's ESG objectives."
When selecting strategies in private assets for our portfolios, we are exploring - with the managers - ways to influence change through both positive and negative triggers.
This is becoming more prevalent in private credit, and there is an opportunity when lending to a company to incentivise them to improve their ESG credentials or, if these deteriorate slide, penalising them. We always prefer positive over negative triggers.
The insurance industry is well placed to be able to influence change because it tends to encompass longer-term investors. Therefore, we are not just there at the setting of ESG goals in our investment holdings but, as longer horizon investors, can monitor the delivery against a company's ESG objectives.
