In 2020, Aberdeen Standard Investments commissioned in-depth research across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland. Our aim was to investigate how insurance investors are responding to environmental, social and governance (ESG) challenges. The full report covers current practice, future objectives and the views of key decision-makers at 60 European insurance companies.
One key theme of our research involves the factors that drive insurance companies to adopt ESG practices. Our respondents identified a number of important drivers. These were values and ethics; risk management; stakeholder management; regulation; and business/marketing opportunities.
Risk management the main driver
Of these drivers, risk management was by far the most important. Some 81% of respondents identified it as a key driver. Most insurance companies are long-term investors, and so the long-term risks of ESG challenges pose significant risks to them. More than two-thirds of life insurers said that their long-term investment horizons prompted their adoption of ESG practices. As one French life insurer told us, “ESG factors, particularly climate-related risks, will materialise in a timeframe shorter than the holding period of our private assets or the maturity of our long-maturity bonds.”
Property & casualty (P&C) insurers took a different view. They have shorter investment horizons and invest mainly in highly liquid asset classes, so ESG factors are less significant. One UK P&C insurer put it like this: “The majority of our assets is held in money-market funds and short-maturity investment-grade bonds. Not only is there little ESG analysis we can do on these asset classes, but we are also faced with the reality that ESG factors are unlikely to influence our investment performance”.
ESG: more risk than opportunity
Overwhelmingly, ESG is seen as a risk rather than an opportunity. While 82% of life insurers and 67% of P&C insurers identified risk management as a key driver of ESG practices, fewer of them saw sustainable investment as an opportunity.
Only 24% of respondents claim to consider sustainability factors when identifying investment opportunities. These respondents see investment opportunities in key sustainability themes, particularly in green private assets. Insurance companies’ exposure to unlisted asset classes is often limited, however, with most investments in public long-only fixed-income products. This inherently places a limit on the potential of green private assets as a key driver of sustainable investment practices.
Stakeholder scrutiny is driving change
There are signs of a shift, however. Although only 33% of insurance companies currently consider sustainable investment to be a business or marketing opportunity, some are starting to see ESG in a new light. This shift stems from increased pressure from policyholders, along with a realisation that insurers can differentiate their value proposition to end-clients.
As a result, certain insurance companies are now appealing to clients by promoting their sustainability credentials and offering innovative products to allow them to ‘give meaning to their savings’.
Nevertheless, the business or marketing opportunity is a low-ranked driver, particularly among P&C and reinsurance businesses. The most common explanation is the perceived remoteness of investment strategies from a client’s commercial decision. As one P&C insurer in the UK noted, “Most of our policyholders do not make a direct link between their insurance policy and the fact that we invest assets. Few of them know that their premiums are invested at all”.
As insurance companies become increasingly vocal about their ESG practices, the question of firm-wide consistency arises. Can insurance companies take ESG beyond their investment process and into their business model? Our respondents highlighted three areas where this is happening.
The first such area is the alignment of sustainability policies across assets and liabilities. This is not always possible. Life insurers have little leeway to choose their retail clients, for example. But reinsurance and P&C companies report clear opportunities to use ESG criteria in their underwriting activities. Some firms may not wish to exclude assets exposed to climate risks but can still raise their premiums accordingly.
The second area is the alignment of ESG with corporate social responsibility (CSR). Most insurers had CSR policies before they began to consider ESG, and the emergence of sustainable investing has led many to seek to align the two areas. The most common implementation concerns climate. Of those insurance companies that are seeking to lower their portfolio’s environmental footprint, 46% have also implemented measures to lower the climate impact of their own operations.
Finally, life insurers face a specific challenge to ensure consistency across their own general-account investments and unit-linked investments, for which policyholders bear the investment risk. Some 41% of life-insurance companies are seeking to ensure a minimum standard across all their investment solutions. There are challenges here, however, because unit-linked products often include externally managed funds. The common strategy for life insurers is to ensure a solid ESG foundation in their general-account assets, primarily driven by risk-management considerations, and to give clients the opportunity to select unit-linked products that go beyond this minimum framework.
Some insurance companies are now aiming to achieve a competitive edge through sustainable products, including ESG model portfolios that offer clients unit-linked solutions entirely composed of ESG-labelled products. There is a clear opportunity here for companies to use their sustainability credentials to fuel growth and attract new clients.
You can read our full insurance-survey report here.