The ReInsurer caught up with Hannah Simons and Beat Holliger from Schroders on the group’s commitment to ESG investing and why ILS is well suited to this approach.

Hannah Simons and Beat Holliger

In November last year, Schroders made an important commitment. The group publicly announced that it would be integrating environment, social and corporate governance (ESG) across all of its investments by 2020.

Driven in part by a growing and encouraging interest by clients, the move was the formal communication of work that was well underway at the firm, Hannah Simons, who is part of the sustainable investment team at Schroders, described this as the next phase of the group’s ESG journey which has evolved over time.

Schroders’ Sustainability Accreditation spans ‘Screened’, ‘Integrated’, ‘Sustainable’ and ‘Impact’ categories, and it helps Schroders’ clients distinguish how ESG factors are considered across its products.

And the asset management business is sticking to its word. By the end of August this year, 95 percent of Schroders’ assets were ESG integrated.

Speaking to The ReInsurer, she said: “Whilst for some, sustainability is relatively new, it is very fast paced. The landscape has shifted considerably as clients ask more questions, seek to express their sustainability preferences and add to this growing interest from regulators, we will continue to see our approach to sustainability and products evolve over time.”

Simons added: “Our integration commitment was a really important statement reinforcing the importance of sustainability and ensuring that every single investment process here at Schroders embeds ESG into its investment process.” To do this, Simons explained that all investment teams and professionals will have a systematic way of considering the sustainability risks within their investment processes, including ILS. 

Simons added that as the firm nears completion of its integration goal it is looking beyond this to understand the impact of its investments. She said we want to make sure our investors and clients understand the impact their investments have on society.

Investors are increasingly considering the ESG properties of their portfolios, said Simons, with Beat Holliger, head of product management, at Schroder Secquaero, adding that ILS can be aligned with positive ESG attributes which could help improve protection against both short-term and long-term risks associated with climate change, as one example.

Often asked about the ESG attributes of this unique asset class and how these translate into responsible investment policies, Holliger said ESG considerations are important to the long-term performance of any investment. 

“We believe the ILS asset class is naturally aligned with ESG principles and that a continued commitment to high ESG investment standards will not only accelerate ILS market growth, but should also ensure the long-term sustainability and attractiveness of the asset class for investors going forward,” he said.

Climate change and resilience

“Delivering attractive financial returns to investors with sustainable investments is one of the key targets of the Schroders Group,” he added. “In order to be a responsible investment manager, we however, look beyond the financial factors as we believe there are other non-financial factors which drive the quality of assets.”

Specifically looking at the role of ILS ESG, Holliger said the framework aims to implement a “true sustainability strategy for the future and thus avoids undesired ‘greenwashing’ effects where ESG deteriorates to a simple marketing strategy without impact.”

Schroder Secquaero’s ILS ESG framework focuses on key non-financial issues which Schroders believes can positively impact the asset class. These issues revolve around:

  • Fund structure: Ensuring it is set up in a jurisdiction with robust institutional and regulatory capacity and that a third-party audit is conducted
  • Special purpose vehicle (SPV): Ensuring a strong regulatory environment in which the SPV is set up, including third-party audit and quality of board of directors
  • Transaction sponsor: Knowing transaction sponsors through structured KYC processes and understanding the motivation for sponsoring the transaction.
  • Covered risks: Considering the ethical and impact aspects of the risks we sell protection for

Understanding ESG risks in ILS investment activities

Environmental - Most of non-life ILS covers risks related to natural catastrophes and are, as such, closely linked to the environmental aspect of ESG. Costs of such catastrophes have increased over time due to population and exposure growth (especially in coastal areas that are vulnerable to weather events) or aspects of climate change.

ILS have shorter maturities and price adjustments take place more regularly. Frequently updated models reflect the latest scientific research, eg, new findings about tectonic fault lines or changes in weather patterns and their impact on the frequency/severity of events and ultimately, climate change.

Social - (Re)insurance and the pooling of risk undoubtedly has social benefits. The global insurance markets help to diversify risks away from local markets and therefore relieve economies in case of a major event. ILS can also address the protection gap by developing products for low-income markets where conventional risk transfer products are not available or not affordable.

In some cases, public entities and supra-governmental organizations have stepped in to sponsor transactions that will help ease the impact of large losses on economies and societies.

Governance - The goal towards sustainable investments also includes due diligence on the sponsor of an ILS transaction, the structure of the transaction and on who its beneficiaries are.

Governance checks take into consideration aspects such as the domicile of the sponsor, sanctions against the country of the domicile or corruption levels that might result in inappropriate handlings of loss payments.

Usually, the ILS manager would not know the identity of the ultimate policyholder who receives the compensation payments under its insurance policy in the event of a payout. Information on policyholders is subject to data protection laws.

For life risk, which is an area that Schroder Secquaero is one of the market leaders, emphasis is placed upon understanding how policies are distributed to ensure compliance with distribution and consumer protection regulations and to avoid misaligned incentive structures and mis-selling risk. It would, however, be beneficial to receive information on the occupancy or industry sector of policyholder, especially for commercial insurance. A sector classification of ultimate beneficiaries would allow addressing restrictions of certain sectors within investment guidelines of our clients.

Findings

(Re)insurance addresses already many aspects of ESG. The challenge for fund managers is to come up with a framework that demonstrates to stakeholders that the business takes ESG seriously, thus avoiding potential criticism of ‘greenwashing’ the ESG disclosures the group makes, but not performing accordingly.

“Our aim is to become a thought leader for ESG in ILS by pushing the market towards increased transparency and improved disclosure,” said Holliger.

“This would allow us (and the market) to make betterinformed decisions that will ultimately result in more sustainable, ESG-compliant investments.

“ILS can contribute to this objective by being integrated into the overall ESG framework as a first step, but can further develop over time towards impact investing,” he concluded.