By Chris Fowle (@ChristoFowle), Director of Americas, PRI, and Christine Pishko, Relationship Manager, US, PRI
While insurance companies in Europe have been publicly embracing and reporting on the incorporation of ESG issues in their investment portfolios, their US counterparts have been far less forthcoming. Over 110 insurance company general account asset owners are PRI signatories, but only a few of them are based in the US. However, we know from our conversations with investors that some insurers actually have meaningful practices and programs within their investment portfolios. The US insurance regulatory landscape is beginning to evolve as well, leading with an increased focus on climate resiliency.
On November 9th, we partnered with the CFA Society Boston on an event featuring the PRI’s work on ESG in credit risk and ratings, led by Carmen Nuzzo, the PRI’s Head of Fixed Income. It advocates for a transparent and systematic consideration of ESG factors, when credit rating agencies and investors assess issuer credit quality. Ms. Nuzzo was joined by New York State Department of Financial Services (NYSDFS) Director of Sustainability and Climate Initiatives, Yue (Nina) Chen, as well as two fixed income investors who manage insurance portfolios: Matt Daly, CFA, Head of Corporate and Municipal Teams, Conning Investment Management and Emily Weiner, Head of Fixed Income, TIAA General Account.
They discussed their approach to ESG and climate risk. Watch the full recording of the session and read the highlights below.
ESG consideration for insurance companies and their fixed income portfolios is not “new”
Carmen Nuzzo, PRI, 4:54
Ms. Nuzzo started the conversation noting the unique risk stance of insurance companies, who not only need to be aware of their investment portfolios, but also to consider ESG incorporation in their underwriting work to mitigate risk.
Insurers are accustomed to evaluating risk and incorporating volumes of data to assess it and should look to apply a similar practice to their investment portfolios. Many ESG factors are likely considered in a robust fixed income investment strategy, but to fully mitigate risk, it is important to consider all factors. Ms. Nuzzo’s suggested area of focus for insurers for investment portfolios: particular consideration should be given to incorporation of ESG issues into stress testing and scenario analysis, though tools are more widely available for climate criteria than social criteria. Additionally, the PRI’s quarterly credit rating agency update report is a great resource for investors just getting started with ESG incorporation, as it details the progress credit rating agencies are making in better signposting how ESG factors feature in their credit ratings (4:27 -16:00).
Climate change is a material risk to the financial system. As a financial regulator, it is fully within our jurisdiction to make sure our regulated entities manage it well and are prepared for it
Yue (Nina) Chen, NYSDFS, 18:44
Ms. Chen continued the conversation describing her new role at the NYDFS and the objectives for the program they have started to roll out this year, which will reach nearly 1,800 insurance companies with over $4.7 trillion in assets – from large global organizations, to small family-owned businesses. In addition to committing to The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Sustainable Insurance Forum (SIF), NYDFS is the first US financial regulator to establish a set of holistic expectations focused on the financial risks posed by climate change.
In 2021, insurers will need to respond to questions during their examinations on how they incorporate financial risk from climate change into their governance, risk management and business strategies, and start to develop an approach to disclosing the financial risks from climate change. In the circular letter NYSDFS sent to New York insurers in September, the physical and transition risks on both sides of insurers’ balance sheets – underwriting and investments – were emphasized (16:43-26:00).
We explicitly integrate ESG factors into the investment process. We believe this best allows us to adhere to our fiduciary duty
Matt Daly, CFA, Conning Investment Management, 27:45
Mr. Daly carried on the conversation to describe current investment practices at Conning. The firm’s career industry investment analysts provide internal ESG ratings and research notes allowing for the integration of that analysis directly into both their overall assessment of the issuer credit profile and within their relative value investment framework.
But beyond their established investment practices, clients are making requests as well. Upon request, Conning monitors and reports on carbon intensity and transition risk for many European clients. But Mr. Daly noted that US clients are beginning to focus more on ESG issues due to demand from various constituencies, boards, shareholders, investment committees and regulators (27:03-35:28).
Because our liabilities are long tailed, we tend to favor longer duration assets, which of course, means that risks like climate change are front and center in the portfolio
Emily Weiner, TIAA General Account, 37:18
Ms. Weiner also cited ESG incorporation as a means of meeting fiduciary duty and achieving optimal portfolio investment outcomes. But, the evaluation of climate risk to the portfolio actually resulted in two specific investment actions for the fixed income portfolios of the TIAA General Account.
One was taken in response to the identification of a “carbon hotspot” that built up due to an investment preference for long dated securities in a favored high-quality sector, utilities. Once identified, the team instituted a swap program, which, after two years reduced exposure in their corporate fixed income portfolio. This ultimately reduced the carbon footprint of that portfolio by 3% without an adverse impact on its yield. The second action was to incorporate scenario-based data to consider physical risks to the portfolio in the context of making investment decisions in their municipal bond portfolio. They will look to expand this process to other sectors in 2021.
Join us on 14 December for the next in the series, where we will continue the conversation with investors of insurance company assets.
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