Why insurers, pension funds should co-opt ESG in investment strategies

Question: What is the significance of considering environmental, social, and governance (ESG) factors for insurers and pension funds in their investment strategies?

The importance of ESG in the decision-making process for insurers and pension funds has become more important, as the world gained consciousness of the impact of climate change and the importance of sustainability.

So, what exactly are ESG factors? They refer to a set of non-financial metrics that measure an organisation’s performance in areas such as environmental sustainability, social responsibility, and corporate governance.

Traditionally, financial analysis has focused on purely financial metrics, such as profits and losses. However, there is growing recognition that ESG factors can have a significant impact on long-term financial performance, risk management, and brand reputation.

This is especially true for insurers and pension funds — important drivers of economic growth and development in Africa.

However, they face a range of challenges that could impact their long-term sustainability. One of the key challenges is the growing recognition of the importance of ESG factors in financial decision-making.

Adopting ESG principles can help financial institutions identify risks and opportunities that traditional financial analysis may overlook, leading to better long-term performance and more sustainable outcomes for stakeholders.

This trend is not limited to developed economies and is a global trend with consumers becoming increasingly concerned about the impact of their financial decisions on the environment and society.

Pension funds and insurers tend to have investments that are long-term in nature and therefore are exposed to significant ESG risks.

Along with this, they are also fiduciaries of their beneficiaries and therefore have a moral obligation to consider ESG factors in their investment decisions.

By integrating ESG considerations into their underwriting and investment decisions, they can identify and manage ESG risks, improve their risk management practice, enhance their long-term financial performance, and contribute to sustainable development.

For example, they can utilise ESG metrics to assess the risks associated with climate change, natural disasters, and human rights violations.

This is especially true given the growing demand from consumers for products and services that align with their environmental and social responsibility.

Good governance practices will also help ensure that insurers and pension funds are managed in an effective, transparent and accountable manner, which can reduce the risk of fraud and misconduct.

Consumers are seeing good governance as important because it provides a level of assurance that their benefits are being managed responsibly.

In Kenya, the adoption of ESG principles in the insurance and pensions industry is still in its early stages. However, there are positive signs that this is changing. The Nairobi Declaration on Sustainable Insurance is an indication of the growing recognition of the importance of ESG in the financial sector in Kenya.

Similarly, the United Nations Principles for Responsible Investment has seen an increase in signatories from Africa, with more than 50 institutional investors from the continent currently signed up.

Insurers and pension funds should continue to prioritise ESG integration in their decision-making process, products, and services.

This will not only lead to better long-term performance but also create positive impacts on our society and environment.

It may seem difficult to commence the integration of ESG, but here are some ways the industry can advance ESG integration:

Set the tone at the top and allow it to facilitate the integration process of the company and this includes strengthening the boards’ responsibility for overseeing ESG issues.

Develop and implement ESG policies and guidelines that align with international best practices, standards, and regulations.

Collaborate with stakeholders, such as regulators, investors, customers, and communities, to identify and address ESG issues and opportunities.

Incorporate ESG factors in underwriting, risk management, investment decision-making, and product development.

Engage in ESG reporting and disclosure to provide transparency and accountability to stakeholders.

Continuously monitor and evaluate ESG performance and impact as well as adjust strategies and practices accordingly. There will be no one-size fits all approach.

The adoption of ESG principles can have significant benefits for financial institutions, investors, and our society.

The Nairobi Declaration on Sustainable Insurance and the United Nations Principles for Responsible Investment provide frameworks for the integration of ESG factors into financial decision-making.

As a society, we all have a role to play in promoting environmentally and socially responsible financial practices, and the adoption of ESG principles is an important step in this direction.

Dodhia is a Principal Actuary with Zamara ([email protected]).

The view and opinions are those of the author and do not necessarily represent the views and opinions of Zamara.