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“We went from a situation where only insurers from a small number of coun- tries, such as the Netherlands, the Nor- dics and Switzerland, had embraced sus- tainability, to a situation where it is at the top of every insurance company’s agenda. This is, at least, how we started 2020. Then, obviously, Covid-19 hit.”
Edward Collinge is global head of insurance strategy at Robeco
CLIMATE RISK AND PORTFOLIO DECARBONISATION HAVE BECOME CENTRE STAGE
Insurance companies are directly exposed to climate risk, and face increasingly tighter scrutiny from regulators regard- ing its impact on their balance sheets. In this context, the gradual decarbonisation of investment portfolios has become a top priority for many of them. But that is eas- ier said than done.
Climate risk has been on insurance com- panies’ agendas for many years. However, a sense of urgency to act appears to have taken hold of the industry in recent months. Why is that? “That’s right. Climate risk, in particular portfolio decarbonisation, has become centre stage. Sustainable investing has long been an area of interest for insurers. Ultimately, they provide downside protec- tion to people in dire circumstances, so sustainability and socially responsible investing is something that fits their investment philosophy. But until recently, it was not necessarily at top of their agenda.
“In Europe, for example, regulatory changes remained a key focus of atten- tion. The continued low yield environ- ment and the search for better-yielding asset classes, was also a major concern. This fundamentally changed around two years ago, when the European Commis- sion told insurers and other institutional investors that they needed to have a sus- tainability framework in place.
42 | portfolio institutional | March 2021 | issue 101
One oft-heard concern, early in 2020, was that Covid-19 might move sustainability down on insurers’ priority list. Has that been the case?
“The economic consequences of Covid-19 and their impact on financial markets have had a significant impact on the bal- ance sheets of insurance companies, but it has not changed their commitment to sustainability. On the contrary, the crisis appears to have boosted the industry’s focus on sustainability. For them, sustain- ability is about improving the stability of returns, the diversification of portfolios and increased downside protection. “Meanwhile, policy makers have not eased the pressure. On the specific aspect of climate risk, for example, we’ve seen a number of important announcements, such as the European Commission and Japan’s pledges for greenhouse gas emis- sions neutrality by 2050. And one power- ful way to help achieve these goals, is to encourage institutional investors, includ- ing insurers, to become carbon neutral. “On the regulatory side, we’ve seen EI- OPA, the EU’s independent advisory body for insurance and pensions matters, issue consultation papers on climate risk and its impact on investment portfolios. EI- OPA has asked insurance companies to start considering climate risk as some- thing they may have to hold capital against. “So, we see insurers increasingly commit- ted to sustainability and climate action and regulators also pushing in that direc- tion. It is all coming together at once. Also, this means that even those not inter- ested in decarbonisation will have to start caring, because when trillions of assets
start moving towards a lower carbon foot- print over the coming years, this will nec- essarily move markets.”
Apart from designing low carbon invest- ment strategies, are there any other ways asset managers can help? “One way asset managers can help is to provide insurers a glide path to decarbon- isation. From that perspective, our recently launched EU-Paris-aligned glob- al fixed income offering – the first of its kind in the fixed income space – is inter- esting, not because this might be the end goal of an EU-Paris-aligned strategy, but because it is an example of how you can take things to the extremes and build your investment process to actively identify firms that are expected to outperform their peers in reducing carbon. “For now, insurance companies may wish to stick to some sort of halfway house. In other words, they may stick to strategies that are not fully compliant with the EU benchmark regulation for Paris Aligned Investments, but that give them an idea of how to get to the ultimate goal of decar- bonising their portfolios by 2050.”
Apart from climate, what are the other are- as investors are asking for? “Topics like gender diversity, inequality, resource scarcity or healthy living are increasingly on insurers agenda. And this can be associated with increasing demand for trends and thematic strategies. Why would an insurer not be investing in something that supports the trend of healthy living or sustainable water? This is a relatively new phenomenon, but it is also gathering momentum.”
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