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Measuring social responsibility – Insurance Investment Exchange roundtable

Measuring social responsibility
Posted March 6, 2018

There is plenty of fine talk – increasingly coupled with ambitious policy objectives – around responsible investment, but hard data about the impact of different approaches on investment portfolios is still hard to come by. This leaves the weaknesses of different strategies exposed to potentially harsh scrutiny by boards and regulators.

These concerns were explored in-depth at the first Insurance Investment Exchange roundtable of 2018 – Responsible Investment: An Emerging Approach for Insurers? – held on 8th February in partnership with Columbia Threadneedle.

Insurers want to embrace socially responsible investment policies but need to develop much greater confidence in the measures of success. Most are clear that there are genuine differences between well-defined ESG (environmental, social and governance) strategies and broader, less well-defined ethical investment policies.

The fear for many is that policymakers and regulators are being attracted towards the latter. The recent report from the European Union High Level Group on Sustainable Finance has heightened those concerns.

Attempts to tweak the capital charges under Solvency II in response is a controversial area. Pressure to drive investment strategies in a direction seen as politically desirable is growing, as most recently evidenced by French president Emmanuel Macron throwing his considerable political weight behind the prospect of changes to Solvency II and giving a major boost to the European Union’s drive to make sustainable finance a core element of all institutional investment strategies. This is also already being done with assets supporting infrastructure projects. But amending capital charges was seen as a blunt instrument and there are worries that the unintended consequences may create new problems and disconnect from the underlying economic fundamentals needed of any investment. Nevertheless, it was acknowledged as a potential powerful weapon: “if you want someone to make the right decision, hit them in the wallet”, said one participant.

Risk-based modeling to guide insurers’ investment policies is a key goal but only once better data on the risk and returns of different responsible investment strategies becomes available. There was an acceptance that the youth of the sector, the lack of consensus around definitions and the long-term nature of some of the investment opportunities under the banner of sustainable finance mean that it could be some time before reliable data that drops neatly into the risk and return models loved by institutions is widely available.

Stress testing might be another angle to approach this issue. For instance, with over 60% of the installed capacity of the world’s largest electrical utilities located in areas prone to flooding, examining the resilience of investment portfolios to various climate change scenarios could appeal as insurers and regulators come under pressure to deliver broader political objectives.

Pragmatism versus purity was another theme developed during the roundtable discussion. There was a consensus that many pressure groups seeking to drive this debate seek a purity that is unrealistic and even potentially damaging.

By taking an absolute approach to rejecting investments in areas viewed as contrary to social or political objectives – such as tobacco, fossil fuels or arms manufacture – too many broad-based global firms with diverse clients and complex supply chains would be ruled out, particularly in a deeply interconnected globalised world. It would also potentially harm firms that themselves invest heavily in beneficial alternatives, such as oil or coal dependent businesses in the energy sector, who are today amongst the biggest investors in renewable energy as they seek to reorient business models.

As one participant put it, a balanced approach is required: “Cut out the blatantly bad – then proactively seek out the good”. This could be refined by the creation of measurable “impact” investment goals.

Adding a robust quantitative framework to the qualitative values that currently dominate this debate would be a valuable tool to help insurers achieve this balance. At present, the lack of such frameworks and associated benchmarks is inhibiting the growth of ESG strategies.

The roundtable concluded with a reminder that investment teams in insurance companies cannot see themselves in isolation. Consistency with underwriting objectives is also important, a key differentiator from other major institutional investors.

Further details of our upcoming Insurance Investment Exchange events and information about how to join the Exchange can be found on our website.

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