Life insurers’ enthusiasm for environmental, social, and governance (ESG) investing is growing as they seek sustainable assets to build their brands and minimize investment risks over the long term.
Asia ex-Japan asset managers expect ESG and socially responsible investing (SRI) to become insurers’ most preferred strategies over the next 12 to 18 months from 2021, a survey by Cerulli Associates finds. By comparison, in 2020, ESG and socially SRI ranked sixth in terms of most sought-after strategies.
Asian life insurers’ interest in SRI and ESG investing is further evidenced by an increasing number of leading insurance companies becoming signatories to the United Nations’ Principles for Responsible Investment (UN PRI), and a growing number of investment-linked products distributed in Asia with ESG funds as their underlying investment portfolios.
“SRI and ESG investing can help insurers to build their reputation and minimize investment risks over the long term for sustainable growth,” says Cerulli senior analyst Ye Kangting. “For example, non-financial indicators on governance enable insurers to screen and monitor investment securities more strictly.”
Although some insurers may have their own definitions of ESG standards, they generally prefer asset managers that are PRI signatories, or those that follow local stewardship codes, according to the Cerulli report, “Asian Insurance Industry 2021: Identifying the Right Paths for Change and Growth”.
Also, while most Asia ex-Japan life insurers rely on external managers to learn about ESG-based investment processes, two-thirds of surveyed insurers have established their in-house ESG specialist teams.
Cerulli notes that most insurers incorporate ESG factors within their investment processes holistically rather than consider ESG investing as a separate theme. Nonetheless, many partnership opportunities exist for managers in offering customized ESG solutions, passive ESG solutions, as well as ESG-specific mutual funds and mandates. In terms of mandate outsourcing, insurers in the region mostly seek ESG-themed global equities, followed by ESG-themed global bonds.
As ESG practices mature among insurance firms, expectations of managers’ ESG commitments will increase. “Therefore, managers should be aware of some key criteria insurers consider when evaluating them on ESG,” Ye notes. “These include senior leadership accountability, size of their ESG assets, and level of intentionality of ESG-focused and impact products. In addition, managers should build strong relationships with insurers by offering the required resources and supplementary capabilities to support the latter’s search for yields, diversification, and liability duration matching, in order to stand out from the competition.”