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Greening of Asset Management
Asset Managers See Rising Insurer Interest in Values-Based Investing

The push comes from a wide range of constituencies—the C-suite, shareholders, bondholders, employees, regulators and rating agencies.
  • John Weber and Staff
  • June 2021
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As the environmental, social and governance movement makes inroads into the insurance industry, insurers are turning to investment managers and outside asset management firms with the goal of better aligning their investments with corporate values. Asset managers and industry watchers say that trend is gaining momentum.

Vincent J. DeLucia New England Asset Management

Some of our clients are interested in exclusionary rules, so certain industries should be kept out of the portfolio.

Vincent J. DeLucia
New England Asset Management

“We think of ESG and value-based investing as a journey for an insurer. There are some key components to this. There's education, there's information, and then there's action. In some sense, this is nothing new for the insurance industry,” Matt Daly, managing director and head of corporate credit research at Conning, said. “There have been instances of alignment of investment portfolios with their own values for a long time. Think of negative screening for single-issue causes. That would be avoiding sin companies or investments in specific countries that might be considered questionable actors.”

“Some of our clients are interested in exclusionary rules, so certain industries should be kept out of the portfolio. Companies involved in tobacco, firearms, gambling, for instance,” Vincent J. DeLucia, chief investment officer, New England Asset Management (NEAM), said. “We are seeing some mandates moving toward having a certain percentage involved in green bonds or sustainable bonds, things of that nature.”

Many factors are involved in the actual incorporation of ESG principles into operations.

Matt Daly Conning

We think of ESG as nonfinancial information that can materially impact the company. This includes the fundamental assessment, general risk awareness, and security valuations.

Matt Daly
Conning

“Incorporation really depends on the type of investments that you're running,” DeLucia said. “If you are marketing and running a fund that is focused on ESG parameters, then you certainly have to bring your own thoughts and opinions to the game and implement those in your strategy. … If you manage separately managed accounts, as many managers do for insurance clients, you're dealing with many, many different sets of client guidelines and many sets of regulatory regimes. In that instance each client really needs to come up with their own assessment or feeling on the importance of ESG and which parameters are important to them.”

“We think of ESG as nonfinancial information that can materially impact the company. This includes the fundamental assessment, general risk awareness and security valuations,” Daly said. “We integrate ESG in the analytic process. This allows for a more holistic investment decision-making. The goal of integrating ESG factors is to provide better risk return characteristics for a portfolio and ultimately to enhance investment results. Aside from integration, there are many other ways to consider ESG. … Things like negative or positive screening or impact investing. That would be basically using capital to make a social or an environmental difference.”

Chris Fowle Principles for Responsible Investment

The SEC announced that they’re going to be looking at climate-related disclosures of companies. Revisiting guidance that they’d put out back in 2010.

Chris Fowle
Principles for Responsible Investment

The push for values-based investing is coming from very different constituencies, Daly said. “This ranges from the C-suite to shareholders, bondholders, employees, customer suppliers, and certainly, to regulators and rating agencies.”

Still, not everyone agrees whether and how ESG activity can be measured and reported.

Stewart Foley, founder of Insurance AUM and editor-in-chief of Insurance AUM Journal, said when people are asked if they support ESG, “Everybody says 'Absolutely.' What that means varies.

“With regard to ESG scoring, there are data providers who are offering that service,” Foley said. “There are others who think that a score is false precision and that you need to look deeper into the investment itself. At the end of the day, it's how do you quantify your ESG, the ESG exposure in your portfolio?”

Each industry will have a different set of metrics, DeLucia said. On the environmental side, he said: “Things like greenhouse gas emissions can be measured as a percentage of revenue or as a percentage of profits, for example. Carbon intensity, water intensity etc., those are things that really are dependent on a company's industry.”

Stewart Foley Insurance AUM

There are data providers who are offering [ESG scoring]. There are others who think that a score is false precision and that you need to look deeper into the investment itself.

Stewart Foley
Insurance AUM

For social and governance metrics, measurable aspects of ESG incorporation include diversity on the board, diversity of the workforce and wage gaps between executives and employees, he said. “Some companies are better at reporting than others. It does appear that that's the direction we're going to go down, so reporting should become more consistent and more detailed over time,” DeLucia added.

“We assign our own proprietary ESG risk factor ratings for every company or issuer in our coverage universe,” Daly said. “Are the ESG risk factors strong, average or weak, and then how does that influence our assessment of the company? Does it influence fundamentals positively or negatively? It has to start with reliable, relevant information and data. This can come from companies themselves, third-party data providers, and we're seeing it now more from rating agencies.”

One emerging risk for investors is stranded assets, Daly said.

“Let's start with defining what a stranded asset is,” he said. “It relates to assets that lose value due to changes associated with energy transition. That's a risk directly associated with a transition toward a lower carbon economy. There could be regulatory changes or demand shift on the preference side. The fossil fuel industry and those reliant on fossil fuels as inputs, they're the ones most at risk here. There are definitely some real-life examples of this. Coal-related investments or power plants, as well as crude-related infrastructure, things like drilling rigs that are sitting idle now. This is a little bit of a different twist, but an interesting example to consider, just in light of energy transition risk and the reduction of value, recent charges big oil companies have taken.”

“Probably the closest example to the possibility of stranded assets at this point is coal,” DeLucia said. “A lot of restructuring, a lot of bankruptcies in that industry. There are some questions to whether or not the coal reserves are actually worth what they say they are on the books. The bankruptcy in that space I think is indicative of the problems there.”

One element on the horizon is greater pressure from regulators and lawmakers.

“The SEC announced that they're going to be looking at climate-related disclosures of companies,” Chris Fowle, director of the Americas, Principles for Responsible Investment (PRI), said. “Revisiting guidance that they'd put out back in 2010 to guide companies in terms of how they're talking about, thinking about or analyzing the risks and opportunities related to climate.”

“There's no secret that the U.S. has lagged Europe in this area,” Daly said, “but we're seeing much more significant action now on our domestic front. That gap is going to narrow.”


John Weber is a senior associate editor. He can be reached at john.weber@ambest.com.


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Beware the Sirens of Environmental, Social and Governance Investing


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