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Robeco: Climate risk and portfolio decarbonisation have become centre stage

19 Mar 2021

Edward Collinge is global head of insurance strategy at Robeco

Insurance companies are directly exposed to climate risk, and face increasingly tighter scrutiny from regulators regarding 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 companies’ 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 protection 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 attention. The continued low yield environment and the search for better-yielding asset classes, was also a major concern. This fundamentally changed around two years ago, when the European Commission told insurers and other institutional investors that they needed to have a sustainability framework in place.

“We went from a situation where only insurers from a small number of countries, such as the Netherlands, the Nordics and Switzerland, had embraced sustainability, 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.”

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 balance 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, sustainability is about improving the stability of returns, the diversification of portfolios and increased downside protection.

“Meanwhile, policymakers 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 emissions neutrality by 2050. And one powerful way to help achieve these goals, is to encourage institutional investors, including 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 something 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 direction. It is all coming together at once. Also, this means that even those not interested in decarbonisation will have to start caring, because when trillions of assets start moving towards a lower carbon footprint over the coming years, this will necessarily move markets.”

Apart from designing low carbon investment strategies, are there any other ways asset managers can help?

“One way asset managers can help is to provide insurers a glide path to decarbonisation. From that perspective, our recently launched EU-Paris-aligned global fixed income offering – the first of its kind in the fixed income space – is interesting, 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 decarbonising 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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