Comment: Where eagles dare

On the back of five months of research, sponsored by JP Morgan Asset Management, on insurers' sustainable investment strategies, Vincent Huck reflects on the state of ESG integration at insurers, and why it's time for investors to 'dare'

"The eagle has landed" were the momentous words Neil Armstrong used to announce the lunar lander had delivered humankind to the moon in 1969.

In 2013 those same words were the headline that first brought me to the topic of environmental, social and governance (ESG) in financial markets – a set of topics of heightened relevance to our own planet.

For it was in 2013 that the International Integrated Reporting (IR) Council published its consultation draft of the International IR Framework, establishing guiding principles for, and the content of, companies' reports on how they create value.

The headline and article were not mine - a colleague and good friend had got that story - but it sparked a deep curiosity in me.

What was this "new kid" on the block? And how much of it was marketing? 'Creating value', after all, is a beautiful term...that doesn't actually say much.

Since then I've followed and reported on the issue of ESG criteria with a keen interest as the topic was moulded – or rather, pushed and pulled from all sides, according to each stakeholder's individual interests.

It's evident that the topic is marred with "greenwashing", skilfully crafted over the years by marketing and PR professionals. If you hear the word 'ambitious' in a sentence about how a firm is tackling sustainability, trust me, alarm bells should be ringing. The ambition is probably to do as little as necessary.

Recently, as the COVID-19 lockdown in London eased, and pubs opened, I went for a drink with an investment professional. We were discussing a chief investment officer I've tried to approach, unsuccessfully, for comments on a deal that the insurer made.

"I think if you asked him about ESG, he'd answer your calls," the professional said. "He strikes me as big on ESG."

But aren't they all? I retorted.

The investor laughed, adding: "Don't get me wrong, it's certainly not by personal conviction, but it would probably help if his firm was seen as active in that sphere."

Nothing in this conversation is surprising and in one sense it doesn't matter what the motivation is, as long as it gets the (ESG) job done.

But still, at the start of 2020, when tasked to research insurers' sustainable investment strategies, the challenges they face in designing and implementing those strategies, and the potential clashes this sets up along the way with third parties such as asset managers, consultants and rating agencies, I had little idea of the 'empty shells' I would find.

Under anonymity, chief investment officers, heads of sustainability and heads of responsible investment, candidly told me that while everyone is 'talking the talk' no-one is truly 'walking the walk'.

And perhaps the most telling of their answers came to the question: "how do you measure the success of your firm's sustainable investment strategy? What exactly constitutes success?"

Well... there is no measure of it, beyond a firm steering away from bad press.

For some insurers, measuring a sustainable programme's success is not possible, because the tools to measure that do not exist yet. For others, the simple definition of what 'success' is, or should be, is still in the woodwork, thus far only a vague concept, so one can't confidently say "this was successful".

Yes, ESG funds have been created and are now being launched at the speed of light. Slowly ESG indexes are being developed and investors can benchmark their investments against those. So, investors today can easily have 'ESG strategies' without truly breaking a sweat over reputational risk.

Investors can be 'ESG compliant' - because there is no real definition, nor compliance rules. So as long as they say it with enough confidence, who will question it?

Maybe a couple of NGOs and activists, a handful of journalists, but that's no hurdle for seasoned 'spin professionals'. A firm will always be compliant with its own definition, and if it isn't, it can always change that definition.

Integrating ESG into investment processes carries a much deeper question: purpose. In other words, and going back to the concept of "value creation", for whom should a firm create value?

In essence, this is the question that ESG integration poses to investors, including insurers: Is ESG a risk mitigation tool against reputational risk, and against financial risk such as being left holding 'stranded assets'? Or should investors look beyond quarterly profits, and instead finance the economy and the world of tomorrow?

The "match" between economist Milton Friedman, a proponent of shareholder primacy, and philosopher Edward Freeman, a defender of the stakeholder theory, is far from over.

But if Friedman's theory, that a business's sole aim is to maximise value and increase profits for its owners while social responsibility is in the hands of government, might have had legs back in the 1970s, it is completely outdated today, as the nature of businesses has evolved.

Today's companies tend to be ownerless.

They are owned by financial institutions, pension funds and indeed ... insurers!

So, essentially, they are owned by the money of ordinary people from around the world. Friedman's theory applied today would suggest that businesses would have to maximise the profits for these ordinary people. And if that is the case, the concept of 'profit' can go far beyond financial considerations. And businesses, but investors as well, should integrate environmental and social considerations alongside financial ones into their bottom line.

ESG integration has gone a long way and many eagles have landed, one initiative after another. Asset owners, asset managers and corporates are signing up to these new groups and making new ESG pledges. Some of these firms' actions are pure marketing, some are commendable. They are a step forward, but not ambitious enough to help achieve the UN sustainable development goals nor the Paris agreement targets.

There is also a danger that these initiatives turn out to be toothless tigers. Are they truly holding asset owners and asset managers accountable? Would they dare kicking a big investment brand out of their group if that brand was found to be "too soft" on ESG?

If one agrees there is a climate emergency, and one believes that the financial sector has a role to play in tackling that emergency, then this can only happen with a cultural revamp of financial markets and of the organisations involved in them. Today's true and ultimate shareholders are the stakeholders through their savings, pension and insurance. Businesses and investment professionals should look to maximise the environmental, social and financial profit for them.

Armstrong and his intrepid colleagues in the 1960s chose to go to the moon not because it was easy, but because it was hard, to paraphrase John F. Kennedy.

It may not be as far to go as Apollo 11, but insurers as investors are now confronted with a similar dilemma: hardship over ease.

Will they dare do it?