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Asset Management & ESG
Asset Management Professionals Examine Growing Role of ESG in Insurance Portfolios

Asset managers explore the strategies and considerations insurers are employing to adapt their portfolios.
  • Lee McDonald and John Weber
  • June 2022
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Environmental, social and governance—or ESG—has become almost ubiquitous in the insurance industry. In October, an AM Best special report showed that between 40% and 50% of U.S. life, annuity, health and property/casualty insurers are actively engaged in ESG, and the demand from stakeholders has grown.

Given its growing demand, asset managers should expect ESG to run throughout an organization on the portfolio investment side and on the liability side, said Robb Barnum, ESG risk manager for New England Asset Management.

Barnum and Terence Martin, a director in insurance research at Conning, participated in a panel discussion with AM Best TV that wrapped up the four-part special presentation entitled “Asset Management & ESG Imperative.” The first three parts of the presentation appeared in the May issue of Best's Review. Following is an edited transcript of the panel's discussion.

McDonald: What's the big picture on insurers and ESG-friendly investments?

Martin: Conning put out a survey late last year. We got 280 responses from a wide variety of companies—life, annuity, P&C, large and small. We found that 91% of them had some sort of investments aspect incorporating ESG.

When we broke it down by years, 12% of them had been doing it for two years or more. Seventy-nine percent added it within the last two years, so it's ramped up recently. That total of 91% is huge to have some sort of ESG lens on their investments.

We also asked them how engaged they were in ESG overall, be it investments or other aspects of their operations. Eighty-nine percent of them said they were either highly engaged or moderately engaged in ESG. We also asked their level of engagement compared to three years ago, and it has risen 14 points. It's ramping up on all aspects of ESG for all different sizes of insurers. I was really surprised—91% have an investment lens on their ESG.

Related: ESG Under Insurance Regulatory Spotlight

Weber: What share of a typical insurer's portfolio could eventually be considered supportive of ESG?

Barnum: It all depends on how one defines ESG. We think it could be quite high because a typical insurance company, in our opinion, is already starting with a fair amount of assets that we believe are supportive of ESG. If one thinks of agency mortgage-backed securities or municipal bonds, both by their very nature are very supportive of ESG.

Specifically in agency MBS, you have the Fannie Mae HomeReady program, the Freddie Mac HomePossible program, and the Ginnie Mae programs. All are targeted to provide affordable housing to disadvantaged borrowers.

Within the muni space, one could argue that a large part of that sector is supportive of ESG given its bent toward affordable housing, essential services like schools, and environmental projects like water and sewer.

More so, we think ESG should be something that's holistic and not something that's compartmentalized but runs throughout the organization on the portfolio investment side and also on the liability side. Having a set of ESG-friendly assets and then a set non-ESG-friendly assets—we don't think that's going to work. One has to come up with a more holistic approach.

Robb Barnum

Robb Barnum

Terence Martin

Terence Martin

McDonald: Organizations are offering quantitative assessments to measure ESG compliance. Are they finding traction?

Martin: There's a number of different standards out there. It's an alphabet soup. There's the Sustainability Accounting Standards Board, the Task Force on Climate-Related Financial Disclosures, and the Principles for Responsible Investment. Those are standards being promulgated and there is no consistency amongst them. Then you've got companies like MSCI that put out ratings. Morningstar has a rating that will give a score, almost like a credit score.

There are several standards out there and there's a lot of noise. Will that coalesce? Likely so. There are several rating agencies in the standards world. AM Best is issuing ratings on insurance companies [See “Environmental, Social and Governance (ESG) Factors,” p. 27, Best's Credit Rating Methodology], amongst others. They will gain some traction, and they have. In that survey that I talked about, we asked how many standards different companies were reporting on, and [in] most P&C companies, the average was 2.6, either Global Reporting Initiative or CBSB, whatever they are. Life companies reported a few less, 1.9 on average; public companies were higher, roughly 2.5 standards. These standards are a start. The 600-pound gorilla, the SEC, just put out its draft standards for reporting and that will likely start a coalescence of factors. It's still in the comment period, so we don't know where it will land, but it's certainly something that's going to jump-start consolidation on this topic.

Related: Focus on ESG Expands Beyond Environmental, Energy

Weber: Are the perceptions changing for what qualifies as ESG-friendly or ESG-unfriendly investments?

Barnum: It all depends on how one defines ESG. The contradictions abound, and there's some tough choices that need to be made. Regarding Russia, they were in some ESG funds when you had some Canadian oil sands companies that were excluded from those same funds.In the area of coal, they're excluded from many ESG funds and mandates, yet China's left in despite some of their human rights issues. It comes down to definitional differences.

In the way of tough choices, you have electronic vehicles: They're good for climate, but they have some negative environmental impacts in mining for the battery components. You also have some social issues. There's a lot of child labor related to the mining aspect and the processing of batteries. These are some tough choices. Are you going to pick people or planet?

Going down the line, one could justify just about anything. You mentioned weapons. That goes against what most people think of when they think of ESG, but one could definitely make a case for them. It's not the strongest case, but one could make that case and feel very confident in their choice. What is the motivation for holding an asset? Just because one owns a “bad” asset may not make them “anti-ESG.” The firm, Engine No. 1, has a fund that's involved in impact. They have an S&P 500 stock portfolio that has all the stocks from the S&P 500 including Big Oil that is contrary to many people's opinions of where climate-conscious investors should be going. However, very few would doubt Engine No. 1's prowess or commitment to ESG.


AM Best TV

Visit www.bestreview.com/asset22 to watch the full lineup of programs in Asset Management & ESG Imperative.


Lee McDonald is group vice president of AM Best and John Weber is a senior associate editor. They can be reached at lee.mcdonald@ambest.com and john.weber@ambest.com, respectively.



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