Sustainable/ESG investing in insurance: Frequently asked questions

In recent years, the global financial landscape has experienced a transformation, with sustainable investing emerging as a force and potentially driving decision-making processes. The insurance sector, historically conservative and risk-averse, is not immune to this paradigm shift. Recent developments within insurance companies underscore a growing recognition of the intrinsic link between long-term profitability and sustainability considerations. In this FAQ article, we delve into these developments, examining the strategies adopted by insurance magnates, their implications, and the resultant impact on both stakeholders and the broader financial ecosystem. As environmental, social, and governance (ESG) factors increasingly influence investment decisions, it is paramount for industry professionals to understand the evolving dynamics of sustainable investing within the insurance domain.

Why are some insurers implementing sustainable investment strategies?

Many insurance companies have shown a growing interest in investing in impact and sustainable strategies for several reasons:

1. Risk management: Insurance companies are inherently focused on assessing and managing risks. Climate change, social inequalities, and other environmental and social issues can introduce long-term risks to their portfolios. By investing in sustainable projects, insurers can mitigate some of these risks.
2. Regulatory pressure: In many jurisdictions, there's an increasing regulatory emphasis on sustainable investment and disclosure. For instance, regulations might require companies to disclose how they are addressing climate risks. ¹
3. Client demand: As societal awareness of environmental, social, and governance (ESG) issues grows, clients (both individuals and institutional) are increasingly demanding ESG-integrated investment products and options. ²
4. Long-term returns: There's a growing body of evidence suggesting that companies with good ESG practices can outperform their counterparts in the long run. Insurance companies, with their long-term investment horizons, may benefit from these potentially better returns. ³
5. Reputation and branding: Being seen as a responsible corporate citizen can enhance an insurance company's brand and reputation. Many insurers are thus looking at sustainable investing not only as a way to make a positive impact but also as a branding and differentiation tool. ⁴
6. Societal responsibility: Some insurance companies view their role as not just providing insurance but also as a responsible corporate citizen that can make a positive societal impact. ⁵
7. Alignment with core business: Many insurers see a clear link between their core business of underwriting risk and the broader goal of creating a more sustainable and resilient society. For example, an insurance company that provides agricultural insurance might invest in sustainable agriculture initiatives, seeing the connection between the two. ⁶

It's important to note, however, that the extent and manner of sustainable investment can vary significantly among insurance companies. While some are deeply committed and have integrated sustainable investment strategies throughout their portfolios, others might be at the beginning stages or investing in a more limited capacity.

What types of sustainable investment vehicles exist for insurers?

Insurance companies that are interested in sustainable and impact investing are exploring multiple avenues to gain exposure to these strategies. The specific way they achieve this exposure can vary based on the company's size, risk appetite, regional regulations, and investment objectives. Some ways they're seeking exposure and the types of investment vehicles include:

1. Direct equity investments: Insurers can buy shares in companies that have strong environmental, social, and governance (ESG) practices or are in industries with a clear sustainability focus.
2. Green and sustainable bonds: These are fixed-income securities specifically designed to raise capital for environmentally sustainable projects or social initiatives.
3. Private equity and venture capital: Some insurers invest in private equity or venture capital funds that focus on sustainable or impact-driven startups and businesses.
4. Real assets: This includes direct investments in assets such as renewable energy projects (e.g., wind or solar farms), sustainable real estate (e.g., green buildings), and sustainable agriculture.
5. Infrastructure investments: This can involve funding for sustainable infrastructure projects, such as public transportation, clean water facilities, and waste management systems.
6. ESG integration: This involves incorporating ESG factors into the investment decision-making process across all asset classes, whether equity, fixed income, or alternatives.
7. Thematic funds: Mutual funds or exchange-traded funds (ETFs) that focus on specific sustainability themes, like clean energy, water resources, or sustainable agriculture, offer easy exposure for insurers. This is increasingly true for fund-linked insurance products like variable annuities, fixed-indexed annuities, and registered index-linked annuities (RILAs).
8. Impact funds: These funds specifically aim to create a measurable positive social or environmental impact alongside financial returns.
9. Engagement and active ownership: Rather than divesting from companies with poor ESG records, some insurers may choose to remain shareholders and actively engage with the company to encourage better ESG practices.
10. Blended finance instruments: These instruments combine capital from public or philanthropic sources with capital from private investors (like insurance companies) to fund projects with clear societal benefits, but which might be perceived as too risky for private investment alone.
11. ESG benchmarked portfolios: Insurers can also allocate portions of their portfolios to track indices that are based on ESG benchmarks, ensuring their investments align with certain sustainability standards. Some companies and asset managers are also using metrics aligned with the U.N.’s Sustainable Development Goals.
12. Securitized products: Insurers can invest in asset-backed securities where the underlying assets are loans or receivables tied to sustainable projects.

It's important to note that the choice of investment vehicle often depends on the insurer's specific goals. For instance, if an insurer aims for pure financial returns alongside ESG integration, then ESG-benchmarked portfolios or ESG-integrated investments might be suitable. If the goal is a tangible societal impact with measurable outcomes, direct investments in specific projects or impact funds might be more appropriate. As the sustainable investment ecosystem evolves, new vehicles and strategies continue to emerge, providing even more options for insurance companies.

Aligning core business values with sustainable investment strategies

On a more granular level, insurers typically consider a wide range of measures that align with both their core business objectives and broader global sustainability goals. The areas of interest can vary depending on the specific insurance company's business model, regional focus, and strategic priorities. Below are some common impact and sustainable measures insurers may be interested in or have already started doing:

1. Climate change and renewable energy: Many insurers are keen on investments that mitigate the effects of climate change, given its broad implications for insurance risks. This includes investments in renewable energy projects such as solar, wind, and hydroelectric power.
2. Water conservation and treatment: With increasing water scarcity in many parts of the world, projects that promote water conservation, efficient use, and advanced treatment and recycling methods can be of particular interest.
3. Commercial property-assessed clean energy (CPACE) lending: This allows commercial property owners to finance energy efficiency and renewable energy projects for their buildings. It aligns with the interests of insurers, especially those involved in property insurance and looking to reduce risks associated with inefficient and outdated properties.
4. Biodiversity: Investments that promote and protect biodiversity can be essential, especially for insurers involved in agriculture, forestry, and fisheries. Healthy ecosystems can mitigate risks related to pest outbreaks, diseases, and climate-related impacts.
5. Sustainable agriculture and timberland: Sustainable farming practices and responsible timberland management can ensure long-term yields and reduce environmental damages, thereby decreasing potential insurance claims related to environmental disasters or devalued assets.
6. Infrastructure and transport: Sustainable infrastructure projects, such as public transport systems, green buildings, and clean ports, reduce environmental footprints and long-term risks, which can be attractive to property and casualty (P&C) insurers, but also many multiline insurers and some life insurers looking to diversify their general account portfolios.
7. Health and well-being: Projects that promote public health, sanitation, and access to healthcare can also be appealing, especially for health and life insurance providers.
8. Financial inclusion: Insurers, particularly those in emerging markets, may invest in projects that promote financial literacy, access to credit, and other financial services to underserved populations. Milliman’s Microinsurance Centre has been involved in developing many such solutions in emerging markets.
9. Waste management and circular economy: Investments in recycling, waste-to-energy, and other circular economy projects can provide both environmental benefits and financial returns.
10. Affordable housing: Especially relevant for insurers with real estate portfolios, investing in sustainable and affordable housing projects can offer both social impact and financial benefits.
11. Education: Some insurers may choose to invest in educational initiatives or infrastructure, seeing it as a way to improve societal well-being and long-term economic prospects.
12. Technology and innovation: Insurtech, fintech, and other tech-driven solutions that address sustainability challenges (e.g., smart grids, precision agriculture) can be areas of interest.

It's important to emphasize that the exact focus areas can vary based on the company's specific strategic objectives, regional priorities, and stakeholder expectations. The growing recognition of the U.N.'s Sustainable Development Goals (SDGs), as mentioned above, also provides a framework that many insurers refer to when determining their sustainable and impact investment priorities.

What factors are driving demand for sustainable investing?

The demand for exposure to impact and sustainable investment strategies by insurance companies (and the broader financial sector) is driven by a combination of factors, such as regulatory incentives, the potential for long-term returns, reputational benefits, and client demand—all of which were discussed in the first section of this article above. Additional drivers of demand include:

1. Innovation and new market opportunities: Sustainable investments often support innovative solutions and emerging industries, providing insurance companies with insights and opportunities in new markets.
2. Competitive pressure: As more and more companies in the finance and insurance sector adopt sustainable practices, there's peer pressure to not be left behind. Being late to adapt can be seen as a strategic disadvantage.
3. Employee attraction and retention: Many employees, especially younger generations, prefer to work for companies that reflect their values. Embracing sustainable and impact investing can be a way to attract and retain talent.
4. Stakeholder demand: Beyond potential client demand, other stakeholders, like shareholders and activists, also exert pressure on insurance companies to adopt sustainable investment practices.
5. Moral or ethical commitment: Some companies, driven by their leadership or organizational culture, genuinely believe in creating a positive societal impact, seeing it as their corporate responsibility.
6. Long-term horizon: Insurance companies, especially life insurers, have a naturally long-term investment horizon due to the long-term nature of their liabilities. This makes them particularly attuned to long-term trends and risks, including those related to sustainability.

These drivers, combined with the broader global shift toward sustainability and the recognition of urgent challenges like climate change, are pushing many insurance companies to integrate sustainable and impact investment strategies into their portfolios. Many sustainable investments also offer potential diversification benefits that help insurers improve their investment risk/return profiles.

What are some examples of sustainable investing by insurers?

Many insurance companies have already begun investing in sustainable and impact investment strategies. As institutional investors with large assets under management, insurance companies play a significant role in the sustainable investment landscape. While numerous insurers globally are engaging in sustainable and impact investing, some have emerged as leaders in this domain:

Allianz: This German insurer has made strides in sustainable investment by integrating ESG factors across its asset classes. Allianz also has commitments related to renewable energy investments and has set targets to reduce its carbon footprint. ⁷

Aviva: This UK-based insurer has been vocal about the importance of sustainable business practices. Aviva has been involved in various initiatives promoting sustainable finance and has been keen on driving transparency in ESG reporting. ⁸

AXA: The French insurance giant has made several commitments related to sustainable investment. AXA has notably divested from coal and has been a leader in integrating ESG factors into its investment decisions. The company has also committed to significant investments in green assets and has been active in promoting transparency in ESG reporting. ⁹

Legal & General: This UK-based insurer and asset manager has been proactive in addressing climate risks and has used its influence as a major institutional investor to engage with companies on their ESG practices. ¹⁰

NN Group: Based in the Netherlands, NN Group has been committed to responsible investment and has a clear policy on integrating ESG factors. The company has also been involved in impact investing, focusing on areas like renewable energy and microfinance. ¹¹

Prudential Financial (U.S.): Prudential has been involved in impact investing for decades, especially in areas like affordable housing and social entrepreneurship. The company has a dedicated impact investing unit and has made substantial commitments in this space. ¹²

Swiss Re: As one of the world's leading reinsurance companies, Swiss Re has been a strong advocate for climate change awareness and has integrated ESG benchmarks into its investment process. The company also has guidelines in place for responsible investing. ¹³

Zurich Insurance Group: Zurich has been a forerunner in impact investing, especially in the realm of green bonds. The company has a commitment to responsible investment and has set clear targets for its impact investment portfolio. ¹⁴

These are just a few examples, and many other insurance companies worldwide are incorporating sustainable and impact investment strategies into their portfolios. The shift toward ESG integration and sustainable investing among insurers is part of a broader trend in the financial industry, influenced by the realization of long-term risks associated with environmental and social issues, as well as the potential for sustainable investments to deliver competitive returns. While European insurers and reinsurers have generally been the leaders in the movement toward sustainable investment, there is increased attention from U.S. insurers. Furthermore, many of the above-mentioned companies have U.S. subsidiaries that are held to the same or substantially similar standards.

Beyond sustainable investment strategies, what else should insurers be aware of?

There are a few additional points worth noting about insurance companies and their interests in impact and sustainability:

1. Collaborative initiatives: Many insurance companies are joining collaborative initiatives and platforms to promote sustainable finance and share best practices. Examples include the Principles for Responsible Investment (PRI), the U.N. Environment Program Finance Initiative (UNEP FI) Principles for Sustainable Insurance, and the Net-Zero Asset Owner Alliance.
2. Capacity building: As sustainable and impact investing grows in complexity, there's an increasing need for expertise. Many insurers are investing in training their teams, developing proprietary tools, and collaborating with external experts to better understand and navigate the sustainable investment landscape.
3. Custom metrics and reporting: While standardized ESG metrics are becoming common, some insurers are developing custom metrics tailored to their business models. This customization allows for a more nuanced understanding of the risks and opportunities specific to their portfolio and operations.
4. Barriers and challenges: While the momentum is positive, there are challenges. They include a lack of standardized ESG reporting, concerns about potential trade-offs between financial returns and sustainability, and the complexities of measuring the real-world impact of investments.
5. Innovation in products: Beyond their investment portfolios, some insurance companies are developing sustainable insurance products. These products could be policies that offer discounts for green buildings or electric vehicles, or insurance products tailored to renewable energy projects.
6. Role of reinsurance: Reinsurers, which provide insurance to insurance companies, play a crucial role in the industry's shift toward sustainability. They often have advanced modeling capabilities and a broader global perspective, and their insights into climate and other systemic risks are shaping the industry's approach to sustainable investing.
7. Engagement over exclusion: While divestment from certain sectors (like fossil fuels) is one strategy, many insurers are choosing to remain invested and engage with companies to drive positive change. This "engagement over exclusion" approach can be particularly impactful given the significant influence insurers wield as institutional investors.

In summation, the insurance sector, once a bastion of traditional investing, now stands at the forefront of sustainable investment practices around the globe. The recent strategic shifts within insurance companies toward sustainable investing aren’t just a testament to evolving market dynamics, but also to a deeper understanding of long-term value creation that extends beyond mere profitability. The convergence of ESG factors with core investment strategies indicates not just a transient trend, but a potentially foundational change in the very ethos of the industry. As many insurance firms progressively align their portfolios with the principles of sustainability, they reinforce the broader narrative that financial stability and sustainable development are not mutually exclusive but rather intrinsically intertwined. The journey ahead promises to be both challenging and rewarding, as the industry seeks to recalibrate its compass toward a more sustainable and resilient future.

¹ “The Rise of International ESG Disclosure Standards." 29 Jun. 2023, https://corpgov.law.harvard.edu/2023/06/29/the-rise-of-international-esg-disclosure-standards/.

² "Integration of Environmental, Social, and Governance”,13 Jul. 2023, https://www.nature.com/articles/s41599-023-01919-0.

³ “Does it pay to deliver superior ESG performance? Evidence from US S&P 500 companies" 11 Aug. 2022, https://www.emerald.com/insight/content/doi/10.1108/JGR-01-2022-0006/full/html.

⁴ "How does corporate social responsibility transform brand reputation into brand equity? Economic and noneconomic perspectives of CSR" 28 May. 2020, https://journals.sagepub.com/doi/full/10.1177/1847979020927547.

⁵ “Corporate Responsibility, 28 Sept. 2020, https://axaxl.com/fast-fast-forward/articles/corporate-responsibility_the-many-ways-insurers-can-drive-positive-sustainable-change.

⁶ “Insurers Take Up the Climate Fight | BCG - Boston Consulting Group." 19 Aug. 2020, https://www.bcg.com/publications/2020/insurers-take-up-the-climate-fight.

⁷ See ALLIANZ GROUP Building confidence in tomorrow Sustainability Report 2022 – short version.

⁸ See https://static.aviva.io/content/dam/aviva-corporate/documents/socialpurpose/pdfs/aviva-sustainability-report.pdf.

⁹ See Our Impact. Our Future. 2022 Sustainability Report (axaxl.com).

¹⁰ See ESG investing tools | Legal & General (legalandgeneral.com).

¹¹ See NN Group - Responsible investment (nn-group.com).

¹² See https://prudential.scene7.com/is/content/prudential/Impact_Management_Policies_Disclosure_Statement?$scene7DefaultPreset$.

¹³ See 2022-financial-report-doc-en.pdf (swissre.com).

¹⁴ See https://www.zurich.com/en/-/media/Project/Zurich/Dotcom/sustainability/docs/annual-report-2022-ISD-standalone-en.pdf?v=2.

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