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Insurers continue to integrate ESG

Global asset manager abrdn and Hong Kong-based financial services strategy consultancy Quinlan & Associates launched the first APAC Insurance Investment Landscape report, which explores how insurers in the APAC region are tackling – and capitalizing on – various industry-specific developments, and tries to understand the priorities in their future investment strategies. We spoke to abrdn’s Mr. Xiong Jian about what insurers are doing about ESG. By Ahmad Zaki

As regulators in APAC have set out rapidly evolving expectations on ESG requirements for regional insurers, particularly focusing on environmental initiatives such as net zero and risk management strategies, insurers have been incorporating ESG considerations into their operations and investments. This was according the first APAC Insurance Investment Landscape report, produced by global asset manager abrdn and financial services strategy consultancy Quinlan & Associates. The survey findings showed that 70% of APAC insurers have either already integrated ESG into their investment strategies or are in the progress of doing so, while 50% of respondents have not yet started to integrate net zero. Data quality remains the largest integration barrier for both ESG and net zero, followed by investment management, which are the starting points of the entire integration value chain. An average of 62% of APAC insurers believe local ESG regulations will become stricter in the next three years and expectations are particularly high in Australia (77%), Malaysia (72%) and Hong Kong (69%). The report surveyed 56 senior executives across 43 insurance companies covering eight markets in APAC, including Hong Kong, Singapore, mainland China, Thailand, Taiwan, Malaysia, Australia and South Korea on six key topics ranging from regulatory adoption to ESG and net zero, to investment and hedging strategies, ILP business and external partnerships. abrdn senior insurance solutions director Xiong Jian said, “We see regulatory adoption and ESG integration as high priority focus areas for regional insurers amid the current market conditions. The key to gaining a competitive advantage for regional insurers would be to move away from a reactive, compliance-driven mindset to a proactive one, leveraging RBC, IFRS9/IFRS17 and ESG as strategic differentiation points.” Insurer strategies According to Mr. Xiong, similar to conventional investment strategy, implementation of ESG investment can be carried out at strategic asset allocation (SAA) level and underlying asset level. “At SAA level, in addition to risk and return, insurers are adding new dimensions, such as ESG scores or carbon metrics, into their SAA optimization process to create ESG/climate change-aware portfolio,” he said. At the underlying asset level, insurers have three options to exploit their ESG investment strategy:

  • ESG/climate change-tilted index fund/ETF: This type of instrument is normally created using quantitative modelling to ensure a low tracking error with particular index, while having lower carbon emission level, higher green revenue or better ESG profile. It is the ideal option for insurers who would like to improve their ESG status or carbon emission level and at the same time maintain the current risk/return profile

  • Thematic funds: There have been many thematic funds in the market. For example, sustainability-aware funds invest into companies which adhere to the firm’s sustainable and responsible investment approach. Another example is impact investment, which typically to address real world emission reductions and climate adaptation so as to align investments to specific climate outcomes.

  • Segregated mandates: By setting investment guideline for the mandate, insurers can deliberately invest or avoid investing into particular companies or sectors. This form also helps insurers access to special investment opportunities, such as green bond issuance or sustainable infrastructure projects.

Embedding ESG into investing strategy abrdn also provided recommendations for organizations that are just starting out. The first step is in identifying ESG risks throughout the organization, including underwriting and investment. It requires a systematic and consistent approach across an insurer’s risk management frameworks and processes, comprising elements such as risk identification, assessment, monitoring and reporting and mitigation. “First of all, to partner with creditable partners to have access to reliable qualitative and quantitative ESG information. Use that information to understand the current ESG profile,” he said. Second, to work out the ESG investment policies, clearly identify sectors the organization would like to avoid or promote investments and integrate ESG risk factors into security valuation and asset allocation process. Third, optimize investment portfolio with consideration of ESG factors. The optimization can be carried out at both asset allocation level and security selection level. At asset allocation level, an insurer should factor in the ESG impact on return/risk characteristics of the asset classes as well as add ESG as additional dimension for the optimisation. At security level, insurers can adjust the weights of securities based on ESG characteristics or invest into funds/ETFs which are tilted for ESG investment. “ESG integration is an ongoing process. Its performance needs to be constantly monitored and its process need to be closely reviewed,” he said. Outsourcing ESG integration The survey also said that insurers expressed strong demand to outsource their ESG integration efforts, investment execution, as well as hedging strategies to external partners. When considering partners, 96% of surveyed insurers believe that brand, reputation, and performance track record are very important or important factors, while independence is not a concern. This outsourcing may involve some of the following:

  • ESG data service: Insurers partner with data providers to access to qualitative and quantitative ESG data for their internal usage, such as ESG investment, risk management and reporting. This is the most cost-efficient option for insurers to start on ESG. However, insurers need to take efforts to ensure data is standardized and comparable. Also, insurers need to work with data providers to ensure the data is constantly updated and has sufficient coverage for their activities.

  • ESG governance policies and framework. Normally, insurers can work with consultants to establish ESG governance policies and framework for their own organizations. Such capabilities are well established, but insurers need to closely monitor the regulatory and industrial development to ensure their governance stays relevant and sufficient.

  • ESG investment: Insurers could outsource their ESG investment management to professional investment managers. The managers can help insurers analyze impact of ESG factors on asset value, optimize investment portfolio, improve ESG profile while maintaining current risk/return objective and manage portfolio according ESG targets set by insurers. This is the fastest and most cost-efficient way for insurers to implement ESG investment strategies. But insurers need to select managers with good track record and strong capability for ESG investment.

Changing regulatory landscape Insurers also believed that the regulation around ESG requirements would continue to get stricter over the next five years, with governments all around the world focusing on sustainability. “It is quite likely regulators will continue to press ESG matters from the following perspective: Insurers’ corporate governance, underwriting, investment, risk management and disclosure,” said Mr. Xiong. “The details of requirements are expected to be articulated and standardized so that the expected outcome can be well comprehended by the industrial participants and results can be fairly evaluated.”



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