Insurance | Asia

In recent years, the financial industry’s awareness and acceptance of sustainability issues has moved centre stage.

Driven by regulatory change and evolving public opinion, banks, asset managers and pension funds have been integrating environmental, social and governance (ESG) issues into their risk management and investment processes to tackle issues from climate change, to biodiversity loss, to labour rights.

Asia-based insurers are under the same pressures to adapt. But despite all the changes happening elsewhere, half of the region’s insurers have yet to integrate carbon net-zero targets into their strategies. Meanwhile, some 30% of these insurers have yet to embed ESG considerations into business practices.

Clearly much more needs to be done. Part of the problem lies with the quality of the ESG data that’s available in the region – you can’t plan, execute and monitor progress without reliable numbers.

Another critical issue has been the difficulties insurers face when trying to incorporate ESG factors into an investment process, such as strategic asset allocation or security valuation.

There are three sources of sustainability issues for insurers:

Underwriting: Climate-change risk must be managed carefully to avoid unacceptable levels of loss. Insurers need to be aware that underwriting will be impacted by more frequent physical risks – storms, flooding – and transition risks – new public policies, court rulings.
Investment: Insurers are expected to have frameworks and resources in place to assess, monitor and manage the potential, and actual, impact on individual investments and portfolios systematically, and on an ongoing basis.
Compliance: Insurers should assume that mandatory requirements related to ESG and sustainability will take effect soon. Corporate governance, risk management and disclosure are likely to be among the areas most under the spotlight.

The right asset manager can help insurers, not just in Asia, with their investment and compliance requirements so that they satisfy growing expectations around their sustainability obligations.

Investing

Take a single sustainability issue – climate change. Insurers need asset managers who can support improvements in investment portfolio carbon metrics without an adverse material impact on a risk/return profile.

We’ve seen rising interest from insurers in some APAC countries – they typically want to know how to achieve a net-zero target with their existing portfolio or how to adjust their portfolio to achieve net-zero goals while retaining the same risk/return profiles. Accordingly, they look to achieve this by investing in assets with greater exposure to ‘green’ revenues or to those that will improve carbon-emissions trajectories.

That’s why we’ve developed a series of net-zero tilted indices. Each index is constructed to deliver better carbon metrics, low-carbon emission intensity and/or high ‘green’ revenue, and low-tracking error with corresponding benchmarks.

What’s more, these indices are designed to be flexible so they can be customised to better reflect the needs of each insurer.

Different asset managers will have their own investment solutions but it’s important to find one that really understands the nuances of these complex issues.

Compliance

More regulators in Asia can be expected to adopt sustainability guidelines based on those created by non-governmental organisations, such as the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises.

ESG regulation developments for insurers in APAC

Selected examples:

Singapore: Guidelines on Environmental Risk Management for Insurers
Issued in 2020, these guidelines set out the Monetary Authority of Singapore's expectations on environmental risk management for all insurers.
Hong Kong: Suggested disclosures of ESG risks in insurers' investments
In a discussion with the Financial Services Development Council in 2020, the Insurance Authority encouraged authorised insurers to publish and explain their ESG risk considerations in investments.
China: Green finance guidelines for insurers
In 2022, the China Banking and Insurance Regulatory Commission issued guidelines that insurers should ultimately achieve carbon neutrality in their portfolios while simultaneously disclosing ESG risks.

Source: APAC Insurance Investment Landscape - Current challenges and future priorities, abrdn, Quinlan & Associates, April 2023

These regulatory regimes will only become more stringent – moving from the optional ‘comply-or-explain’ model that’s common now towards legal requirement.

That’s why it’s critical for insurers to understand and comply with this ever-changing regulatory environment.

The right asset manager can also help here in three ways:

Asset managers’ specialist ESG research teams can help keep on top of evolving rules and advise insurers on how to stay on the right side of regulators.
Asset managers can engage with management teams to influence an investee company’s ESG practices – challenging a firm when they miss their emissions targets; demanding that ESG data is reported in a format that investors want.
Asset managers can also use their voice at the industry, national and transnational levels to lobby regulators, advocate for positive change or sound the alarm if things aren’t working.