(3/3) Session Summary of CFA Society India Insurance Conference 2021 #IInC

This article is part of a series I wrote on my takeaways from the First CFA Society India Insurance Conference 2021. To read the rest of the articles, head over to my Medium page and search for #IInC.

Photo by Paula Prekopova on Unsplash

Here’s my summary of Session 4 discussed in Day 2 of the First CFA Society India Insurance Conference 2021.

Session 4: Sustainable Investing for Insurance Companies at a time of massive change

Speaker: Roger Urwin| Moderated by: Abhishek Loonker, CFA

Roger Urwin is the Global Head of Investment Content at Willis Tower Watson (WTW). Urwin began with a food for thought that I found very relatable:

“We used to make Life happen earlier — since 2020, Life happens to us...”

Before the pandemic, the global Assets under Management (AUM) under all categories of Pooled Investments stood at about 157 Trillion US$, almost twice the global GDP of 75–80 Trillion US$ (as of 2019). Notwithstanding the devastation caused by the pandemic, this figure highlights the weight that the Investment Management profession pulls over how resources are allocated even before the pandemic hit globally. It also ties up the theme of the presentation, i.e, how and why one should pay attention to what the smart-money or the financial institutions have on top of their mind- Sustainable and Impact-based Investing.

Figure: Global AUMs under Pooled Investments classified by Institution

Given the tightly regulated nature of the Insurance industry globally and the focus on long-term investing especially for Life Insurance Assets, these Asset Owners (AOs) have a significant pull over the thought process of Investment Analysis and Management globally, despite only being the third biggest by AUMs. While Sustainable or Environmental, Social and Governance (ESG) has been picking up interest since a long time, the pandemic has only accelerated the pace at which ESG adoption will become common place among AOs globally.

“Sustainability and Climate Change is a slow train that has started picking up pace among Asset Owners (AOs).” — Roger Urwin

Urwin notes that there are four themes that AOs are increasingly spending time towards thinking and solving:

• Identifying the core Values, Beliefs and the Purpose that drive decisions in their organisations;
• Solving the problem of human development/progress with Sustainability;
• Identifying how to match their vast, talented human capital to work with technology to bring innovation at scale; and
• Ensuring that Regulation and Reputation keeps pace with the latest improvements in business models.

Although ESG investing has seen its share of ebbs and flows in priority as the world grew in cycles of recessionist and expansionist regimes, Urwin notes that the pandemic has necessitated AOs, particularly Insurance companies, to take cognisance to the harmful effects of human progress at the cost of nature. AOs can no longer ignore ESG factors in their decision making, period.

There are recent developments that point to increasing interest in collective action at the grassroots level already. In keeping pace with the targets set forth by the Paris Agreement, a new alliance, the Glasgow Financial Alliance to Net Zero (GFANZ), has been set up under US President Biden that is actively working along with UNFCCC and the COP25 and COP26 nations towards coordinating and mobilising resources to achieve Net Zero emissions across the global economy. GFANZ already counts multiple global Financial Institutions with a cumulative AUM of US$ 70 Trillion.

Although ESG may be picking up interest in recent years, two important problems arise when trying to devise methods to add ESG related factors to traditional financial models.

1. Traditional models are ill-equipped to account for ESG factors.
2. Even if these factors are included, how to identify and measure the ‘impact’ of involving such factors in decision making.

Urwin argues the solution exists in developing new investing frameworks from scratch that integrate ESG from the beginning.

In working with the Thinking Ahead Institute of WTW, he proposes the Three-dimensional Investing Framework that considers the matrix of Risk, Return and Impact. (To read more on the working paper that discusses the idea, click here. )

However, the problem of measuring Impact continues to remain a challenge and merits further discussion.

Another observation that Urwin discusses points to a transition in the focus of Insurance companies towards improving Beta rather than Alpha in the increasing competitive and scarce world of investment opportunities. He notes that this phenomenon is directly lifted off the playbook of major Mutual Fund and Asset Management Companies.

Lastly, he nudged the audience to consider taking up further education in the field of ESG Investing as he considers it a field with tremendous opportunities for future growth. Although a comprehensive course may be unavailable at the moment, practitioners are actively working towards developing an organised module that can be taught as regular course work. (For those interested, one such course is provided by the CFA Institute here. Fair disclosure: this was not sponsored by CFA Institute in any way.)

I was delighted to attend both the days of the Conference as I found the exchanges truly insightful. The themes were very topical overall and showcased topics of interest in the Insurance industry both in India and across the world. I’m looking forward to the next edition of the Conference.

I’m glad to have made notes of the exchanges and I hope to use them in my professional activities in future. I hope you found these summaries useful and worth further reading as well.

Thanks for reading.