The biggest insurance companies around the world are increasingly prioritizing environmental, social and governance (ESG) issues in their investment practices.
For some insurers, this means becoming signatories of the Principles for Responsible Investment (PRI) – a United Nations-supported international network of investors working together to implement six aspirational ESG principles. The PRI has a membership base of more than 3,700 organizations around the world, which includes asset owners, investment managers, and service providers.
Insurance organizations fall into the asset owners category, which Chris Fowle, director of signatory relations for the Americas at the PRI, described as “the top of the investment food chain,” with the ability to influence investment decisions and processes.
“Insurance general accounts are very important for PRI, both in terms of the amount of assets they have, and the potential influence they can have over their own direct investment decisions, as well as their third-party investment managers,” Fowle told Insurance Business. “Both of these asset owners in the insurance context – the general accounts and their direct affiliates or third-party investment managers – are part of an insurance sector ecosystem that we see as very important, and one that is really waking up now to ESG and the principals for responsible investment.”
The first principle of PRI is that signatories commit to incorporating ESG issues into all investment analysis and decision-making processes. They also commit to being active owners and to engaging in related policies and practices. The third principle revolves around data collection – signatories will seek appropriate disclosure on ESG issues by the entities in which they invest. Meanwhile, the fourth and fifth principles are around collaborating with other investors to improve practice, and also to promote the principles in the marketplace. And by following the sixth principle, signatories will report back to PRI on their activities and progress towards implementing the six principles.
“It’s complicated, especially if you’re in a government affairs role, a compliance role, or a legal role at a major insurance company on the general account side, and all of a sudden, you’re tasked with figuring out ESG,” said Fowle. “You wade into this space, you learn what ESG means, and then you’re rapidly confronted with lots of different challenges in terms of the steepness of the learning curve, the breadth of issues, and just the acronyms associated with the very many organizations and initiatives that you need to learn.
“I advise people to take a step back and get comfortable with the idea that what we’re talking about is fundamentally a better approach to investment because you’re thinking about material risks and opportunities that can have an impact on investment decisions, regardless of asset class. There are various misperceptions that one has to overcome in terms of responsible investment, so just getting that basic understanding is really helpful. We’re talking about a better investment process.”
Insurance organizations at the start of their ESG investment journey don’t need to recreate the wheel, Fowle stressed. There are simple steps that they can take, and there’s a lot that they can learn from other companies – for example, many of the PRI’s signatories – around internal and external decision-making processes, and implementing ESG initiatives.
“Frankly, becoming a PRI signatory is a very practical way to get started because it gives you a framework as a conversation starter internally,” Fowle commented. “You can use that framework to approach a committee or the board to say: ‘These are the six principles and the areas that we’ll need to be focused on as we prepare our business to report to the PRI in the next year or two.”
The entry point to ESG for many organizations, particularly insurers, is climate change. In recent years, the global insurance industry has had to reckon with increased frequency and severity of severe weather events. Insurers are looking to build and support more climate-resilient communities, and as such, there’s a lot of interest in furthering investments in this area.
“Just looking at climate change in isolation is challenging,” said Fowle, “because it’s so interconnected with so many other issues. Take social issues, for example, if an insurer is being challenged over their coal investments (which many are these days), what are the implications of a dislocated workforce in the coal sector. That’s a social issue which is inextricably linked to climate. In terms of governance, look at board structure and all the pressure Exxon has been facing about having climate experts sitting on its board, and the climate-related changes they’re committed to making.
“Climate change is holistic in that it impacts a range of ESG issues, and once companies see that, they can start to climb that learning curve and embrace more sustainable finance principles.”