Clarence Wong, chief economist of Peak Re, discusses how sustainable investing has developed in the region and why green bonds might not be the answer.
How has ESG investing evolved in the last year in Asia for insurers? Is there increased inclusion of net-zero considerations?
A lot of things have changed in terms of ESG. Firstly, the pandemic has highlighted some social issues and ESG is no longer so focused just on environment, but also on a broader range of social issues such as health inequality, wealth inequality, food insecurity.
Of course, climate change is still a key topic. Particularly after the series of natural catastrophes we have seen this year and the full knowledge that these are accelerating.
This means that ESG is now more rooted in practices, and an accepted approach to investing. And related to this is that in the past the focus has been to ensure that investors consider ESG factors and climate risk factors in the investment processes, now the focus is on increased disclosures and transparency including in what the ESG investment strategies are.
For disclosures you need data, and there is always this quoted challenge of the lack of data. Do you agree data is a challenge? Is the problem the absence of data, there is not enough of it, or the timeliness of the data?
This is a major, major challenge. The first issue is adequacy of data. Second, consistency of data because different data providers may provide different assessments.
Then timeliness and comprehensiveness are also part of the challenge we face with data.
At the same time, we have to also consider how data is going to be provided going forward apart from anecdotal data that helps us to see what has happened in the past. It will also be less scary to have data that look forward.
A lot of work has been done on the static, backward looking data, but this needs to be broadened, and it is something actively debated in the market.
If you don't have enough data, or if the data you have is not good enough, how can you make an investment decision?
First of all, the data deficit is not an excuse to not pursue ESG investment or to not take ESG into consideration in the investment decision and process.
The data will only tell you part of the story and the investment manager will still have to do their homework to make a judgment. An investment decision is ultimately a judgment. If you have a company that is the biggest greenhouse gas emitter, but they have a good transition plan, then it might be a good ESG investment.
Without being an excuse could the lack of data mean a barrier to investment?
Yes it could, but if you look at it from the company's perspective, if the lack of data inhibit investments there will be an incentive for them to improve their disclosures. So there are two sides to this story.
How do you see the relationship between insurers and asset managers evolving on this topic? In Europe, insurers will say 'we are more advanced than our asset managers,' In the US insurers would say their asset managers are probably more advanced. What's the situation in Asia?
I don't think we can follow this simple classification because from my perspective every company in terms of ESG investing will have their own perspective. They will have to do their own analysis and work out which factors are the most relevant to them.
The challenge is if the asset manager's ESG strategy or philosophy may not fully align with the asset owner's approach to ESG. Some companies may take a more relaxed approach to the gaming industry, for example, while others will exclude that sector all together, but this has nothing to do with more advanced or not.
So when the fund manager and the clients don't have the same approach the challenge is how to address this, because it will be very difficult to change on either side. The asset manager is not going to change its approach for one client, and an insurer won't change its strategy to fit the asset manager, so the question is how to deal with that situation.
Is sourcing ESG investment opportunities in Asia a challenge for insurers? Or do they need to go regional or global?
It depends on the strategy of the company. And there isn't really a classification on ESG assets and non-ESG assets. Our objective is to contribute to the sustainability development of the world. For example a big GHG emitter, is that ESG or non ESG?
And if you look at green labelled bonds, these are not fully standardised yet, so that creates a bit of a challenge. In 2021, there were over 100 ESG funds launched in Asia alone. So the investment universe is getting bigger. On the other hand, the investor will have to decide if they accept those instruments as green or if they will dig deeper and make a judgment on whether they are really green or not.
It's no secret many Asian regulators would want to see more issuance in the region – are they good for return and impact, or just for good conscience?
It is a mix of both. But definitely there are a lot of opportunities arising from the green transition. There are some industries like the global energies like carbon capture and storage where there are good investments opportunities from green bond issuances. That will continue to be the case. Investing in those is not just a feel good exercise but there is also some real economic rationale behind those investments.
As ESG criteria are applied to more asset classes, do insurers need holistic ESG frameworks, or is ESG an investment practice best done 'one asset class at a time'?
This is a difficult question because it relates to what we talked about earlier on the availability of data. You probably will get good data in equity and bonds but when you move into alternatives it will be more challenging from a data standpoint.
So, a company's ability to apply the same approach holistically across all the asset class will continue to be constrained by different granularity of data.
But I think a holistic approach is definitely preferred, and I say holistic not only in the sense of across different asset classes, but throughout the whole company. If an insurer abstains to underwrite certain assets for ESG reason but continues to invest in them, it will impact the credibility of its ESG strategy.
Some are bemoaning policymakers for using regulation to pressure the private sector to push the ESG agenda—do you agree? And is it a bad thing?
I think the investment community has been very active in that space for a number of years. A lot of platforms and initiatives have been set up by the private sector, and often this was done before any moves from the regulators. So if anything I think the private sector has been at the forefront of this for many years.
