A recent survey by global insurance asset management firm, Conning, which polled US life and property and casualty insurers, found 79% of respondents indicated that their firms began to include ESG in their investment considerations in the last two years.
The survey found corporate reputation was a key motivator — 92% of respondents indicated that corporate reputation is either “important” or “very important” as a driver to incorporate ESG investment factors, followed closely by customer and employee concerns, regulatory requirements, leadership concerns about social issues, and the potential for competitive advantage.
Discussing the survey findings, Terence Martin, director of Insurance Research at Conning said: "We found among the companies we surveyed a risk to corporate threats or their corporate reputation was ranked very high.
"There's both offence and defence in those insurers concerned about corporate reputation — we should not necessarily paint them as a defensive one necessarily, because it can be equally on the offensive in the sense of, we do want to reach out to historically underserved populations to sell products and we do want to invest in ways that reduces carbon footprint."
The ESG Revolution
A number of factors have driven the ESG agenda in recent years and in terms of tackling the key issue of climate change, the United Nations Climate Change conference held in Glasgow, Scotland last year saw at least 23 nations commit to phase out coal power, including Indonesia, Vietnam, Poland, South Korea, Egypt, Spain, Nepal and Singapore.
We found among the companies we surveyed, a risk to corporate threats or their corporate reputation was ranked very high.
A report released by the Intergovenmental Panel on Climate Change (IPCC) has warned that "half measures are no longer an option," when it comes to combating climate change.
Scientists have said that human-induced climate change is causing dangerous and widespread disruption in nature and affecting the lives of billions of people around the world, despite measures taken to reduce the risks.
“This report is a dire warning about the consequences of inaction,” said Hoesung Lee, chair of the IPCC. "It shows that climate change is a grave and mounting threat to our wellbeing and a healthy planet. Our actions today will shape how people adapt and nature responds to increasing climate risks.”
While Europe and Asia are leading the way on ESG investing, the US has been slower to adapt. Concerns about return on ESG investment, especially among life insurance respondents, misaligned ESG reporting standards, and a challenging market environment have likely had an impact on the pace at which US insurers are integrating ESG factors into their investment guidelines.
A number of US insurers have only in the past year begun to evaluate their investments using ESG criteria. The survey found a total of 67% of respondents had incorporated ESG factors into their investment considerations in 2021.
Martin added: "The economic risk of investing in certain companies, such as a coal producing company — is not so much just dollars and cents right now, insurers are saying if this pressure continues it is not going to be a viable industry. If this year's or next year's returns are not impacted much long term they are and maybe that is not an industry we want to be in.
"Life insurance especially are long-term investors — property and casualty is still long-term in it's focus compared to other industries. If you end up with stranded assets that's a large risk so a short-term hit on yield may be worth it to avoid the long-term substantial hit with an industry investment becoming untenable."
Companies are evaluating how to integrate ESG factors into their business models, but to be viable they must also identify and assess how these factors can impact their business from a risk perspective, while also identifying new opportunities.
Respondents indicated that their firms already incorporate the following ESG-related considerations into their operations, followed by the percentage of respondents :
a sustainability report, 46%;
a social investment policy, 44%;
a Diversity Equity & Inclusion (DEI) council, 41%;
a governance investment policy, 41%
a diversity officer, 40%.
The report echoes some of the key findings of a survey published by ratings agency AM Best last year, which polled property and casualty, life and annuity, health insurers and reinsurers operating in the US.
From those surveyed, six in 10 US insurers agreed that there is increased pressure from stakeholders to explicitly consider ESG factors within their overall business plan and operating environment and that disregarding these factors could led to some type of reputational risk.
Assessing the Long-Term Risks
Over half of respondents in the property and casualty and life and annuity industries agreed that proper understanding and integration of ESG factors is becoming more critical to the long-term viability of their business, compared with 39% from the health insurance industry.
Martin said: "Some industries are at high risk of getting caught as society changes to a low-carbon economy and some are more prepared for the changes. For example, the airline industry — for an airplane jet fuel is the only option so it is at high risk if something happens to the availability or price of jet fuel. Autos are also very dependent on fossil fuels. However, with the auto industry there is an alternative and it has made huge strides to getting both hybrid and fully electric cars."
Commenting on the findings Jason Hopper, associate director, industry research and analytics at AM Best, explained that all US insurers usually focus on the G part of ESG, the governance factor, both internally as well as externally, when choosing partners and other companies to work with.
He said: “Companies are evaluating how to integrate ESG factors into their business models, but to be viable they must also identify and assess how these factors can impact their business from a risk perspective, while also identifying new opportunities.”
The survey also highlighted a greater need for clarity by insurance associations and regulators on measuring and reporting ESG factors on a globally consistent basis. Around 60% of the industry overall seeks greater clarity from regulators, especially when it comes to identifying, measuring, and reporting ESG factors.
