According to recent European insurance research commissioned by Aberdeen Standard Investments (ASI), 87% of UK insurers believe that risk management is the main driver of their environmental, social and governance (ESG) practices, whilst only 27% currently see ESG as a business or investment opportunity.
Aileen Mathieson, Global Head of Insurance at Aberdeen Standard Investments said, “Sustainable investment in the UK has predominantly been driven by pension institutions, particularly local-government pension schemes and foundations/religious institutions, giving the UK the longest history of ethical investing. However, large insurance companies are now focusing significantly on this as a result of increased regulatory pressure, demand from their customer base and also corporate commitments to Net Zero targets as well as a willingness to devote capital towards post COVID-19 recovery themes.”
Other drivers include regulation (60% UK respondents), stakeholder management (67% UK respondents) and values and ethics (60% UK respondents).
Asset-liability management, the search for yield in a low-yield environment and solvency-capital requirements are all regarded as more important factors than ESG in defining insurance companies’ investment strategies. It also unveiled that ESG is rarely seen as a driver in its own right and is most often considered an input into the investment strategy rather than its defining factor.
ASI partnered with strategy advisors, INDEFI, to interview 60 insurance companies across Europe’s five largest insurance markets: the UK, Germany, France, Italy and Switzerland – covering 42% of the total European insurance market. The purpose of the research was to identify how insurance investors are responding to ESG challenges.
The research also identified that depending on the type of insurer, their regard for ESG is varied. For example, life insurance companies that are long-term investors see ESG as a risk factor over a value creator because the long-term risks of ESG challenges pose significant risks to them. Property & Casualty (P&C) insurers on the other hand have shorter investment horizons and invest mainly in highly liquid asset classes, so feel ESG factors are less significant.
73% of UK life-insurance companies also highlighted stakeholder pressure as a key motivation to develop sustainable practices and offer new products to demanding clients. In comparison, P&C insurers and reinsurance companies were less exposed to this pressure.
Aileen Mathieson continued, “As this pressure continues to rise in the UK, it will encourage all insurance firms to pursue their sustainable investment journey. Some are already beginning to recognise the opportunity to build a competitive edge through sustainable products. This has led to a wave of innovation: from ESG model portfolios offering clients unit-linked solutions entirely composed of ESG-themed products to thematic or impact products that speak to clients’ desire to generate positive impact from their savings. Private market and illiquid credit investments are emerging as particularly suited to insurers’ investment strategies.”
