Enci Wang, senior manager for responsible investment at Prudential, explains how to build a sustainability investment strategy from the perspective of an EM-headquartered insurer.
Where does one start when thinking of coming up with a sustainable investment strategy?
There is a spectrum of approaches. On one end [of that spectrum], you can negatively screen out 'ESG-risky' assets, or on the other end you can be intentionally looking for investments that can contribute to a sustainable outcome. Along this spectrum, you will tailor the strategy depending on your own investment profile, and the nature of the company.
For example, for Prudential, as a life insurer we have a long horizon and it's important to sustain a risk-adjusted return. This means that we need to find ESG megatrends that can have a macro impact for extended periods of time. And on top of that, like other life insurers, we have a suite of different investment strategies. So it's important to differentiate across different geographies and different investment strategies [and find] the most suitable approach.
For example if it's a private asset, and we delegate it to a third-party manager, then we need to integrate ESG related questions as part of that fund manager's selection, to ensure that, from the very beginning, we share a consistent belief or philosophy on responsible investment.
On the other end, if we think about a listed equity investment that's managed by Eastspring, our in-house manager, then that gives us more flexibility to practise engagement, because then we can actually have different layers of milestones and an escalation pathway.
Ultimately, this is a very iterative process, because we're always learning from scratch, in a sense, because there are new topics that constantly come up on the agenda. So, how we allow ourselves to prioritize what's most important to us and how we continue to apply this 'continuous-learning' mindset is very important. It needs to touch on the different functions of the business, to make sure we are having this shared mindset.
If we take a step back, before coming up with a strategy there needs to be a philosophy in place How does one start with that? And who within the business makes the start?
There're several different drivers. The first is, as the business matures, then inherently they have more social responsibility to cover. The second driver is external expectation - the regulations and macro environment, especially in the region we operate in - Asia - for example. All the different jurisdictions are having increasing [amounts of] regulatory policies on how you look at investment and whether it is sustainable.
The third part is down to policyholders, because at the end of the day, we have a fiduciary duty to invest responsibly to align with their financial interest. We've seen quite tangible outcomes of how ESG-risky assets did have a very detrimental return or reputational impact, therefore this has formalized the need to integrate responsible investment thinking from a risk management perspective.
You mentioned the differences in geographies and jurisdictions. An Asian insurer, perhaps, doesn't have the same flexibility as a European or US insurer in setting a responsible investing strategy in the sense that Western insurers can pledge not to invest in coal, for example, where that sector is a marginal part of the economies they invest in. How do you approach this conundrum?
That's one of the most critical and challenging parts for operating in the Asian [region].
For us, taking climate as an example, which is the most cross-cutting risk, what we really adhere to is what the Paris Agreement called the 'common but differentiated' approach.
So 'common' means that we all have a shared responsibility to decarbonize, regardless of which region, whether it's fair or not, as we all need to decarbonize. To this point, we committed to decarbonize our portfolio to net-zero by 2050. But what I really like is the latter part [of the phrase] - 'differentiated', which means that countries that historically contributed more to carbon emissions have a higher responsibility at the current moment, whether it's through supporting emerging markets to transition, or through other means.
Over 770m people do not have access to electricity today, and most of them are in Asia and Africa, where we operate. It will be devastating if we just pull investments out of these economies because they have rising emissions. So, we agree to reach this net-zero portfolio, but at the same time, one has to recognize it will not be a straight, continuously diminishing line, it might even have bumps. How we get there needs to be more flexible, to accommodate the 'social' part of this transition.
Prudential sells insurance policies in Hong Kong, in China, in the rest of Asia, and it needs to invest in those countries to match those liabilities. How do you make those 'unavoidable' investments fit into your sustainable investment policy?
There needs to be a transition framework in place so that what qualifies as 'transition' fits into the 'brown-to-green bucket'. At the moment there is no unified framework internationally so we need to continue monitoring developments, but at the same time we are working on our own proprietary framework.
Secondly, it offers more investment opportunities for us. While investors in developed economies may be more focused on climate solutions, we – given our geographies – can focus on investing in transition assets
This links to the perennial question of the lack, and quality, of relevant data. Perhaps this is even more on an issue in countries like China, Thailand, Malaysia, etc.?
Some countries are not even covered by data providers, which means we need to depend on local business units to have their own proprietary risk assessment framework. This links back to the engagement approach. Local teams that have local expertise and speak the local language can get the information through one-on-one bilateral engagement with investee companies.
Going back to the lack of an international framework, do you find it frustrating that a lot of these sustainability initiatives are driven by insurance companies from so-called 'developed' economies, and the initiatives may not 'fit' in the context of Asian jurisdictions?
In terms of standards setting, Having the developed market view is still important, because we need to keep each other on the same page, know what the end goal is, and be aligned on it. But in terms of how to transition and get there, more Asia-specific taxonomies or standards is what we really need. And it's encouraging to see this happening in the Asia region, including the ASEAN taxonomy, and beyond ASEAN, some jurisdictions like Singapore and China are coming up with some transition taxonomies as well.
Beyond the lack of taxonomies, what are the key challenges for an Asian-headquartered insurer from a sustainable-investing standpoint?
The shortage of local assets, whether transition or green, in general, is a big challenge.
Another one is that, increasingly, there is a proliferation of 'green' standards. I know I've just touched on not having enough transition standards, but at the same time, we're seeing a lot of different 'green'-related regulations or policy developments within the Asian market. In general, we're very supportive of having this regulatory framework because it brings clarity and it drives things forward. But at the same time, we also need to think quite tactically about how to approach it: Do we need to develop 23 different strategies because 23 different markets have different regulations?
The way that we approach it is that, at the group level, the responsible investment policy is more of a guiding principle that needs to apply to all the different regions. But on top of that, we would really encourage each business unit to come up with its own specific initiatives. This would require a deeper understanding of what's happening in each market, but we do believe that this will make it more tailored to that specific country, while also allowing all markets to have a consistent approach because we have the group-level policy in place.
