Issues & Answers Special Advertising Section:
“Insurers need to demonstrate that they're a good place to work to the younger generation that's very interested in the subject of ESG.”
It’s not going away, and it even could increase in focus, especially in the area of regulation. Our European accounts are certainly facing this—stateside, not as much. The California DOI and the New York DFS have started moving forward in this area, though they have yet to establish prescriptive mandates. But there’s good reason to believe that at some point more stringent particulars will come. Recently, the big news out was the SEC’s climate disclosure proposal. Assuming it can withstand the inevitable court battle regarding its legitimacy, it would affect public insurers to some degree. Additionally, there are the rating agencies, though they’re not regulators. But they do have influence over the insurance industry. Then there’s the whole keeping up with the Joneses. There’s this pressure to show that they’re doing something in ESG both to customers and employees.What’s a common question that you’re asked by clients regarding ESG?
One of the more popular questions is, “What will it cost me to green my portfolio?” This question could be answered in so many different ways. One, there’s the metric that you’re focused on. Is this yield? Is this OAS? Total return or excess return? Then there’s the time period. Is this historical? Are we talking about current, or is this some projection that one would like to make? Then there’s the criteria of what is green. Is that just exclusions? Is it improving the portfolio’s ESG rating, or is it a pay up for green bonds? Once all those details have been nailed down, you can begin to tackle the question. For our clients, they tend to mean two things: It’s either what is the current yield or spread give up by improving the portfolio’s ESG rating profile? The other is, what is the current pay up for green bonds over non-green bonds, what’s commonly referred to as the “greenium”?
How are you using ESG ratings at NEAM?
At NEAM, we say that they’re just a piece of the puzzle. We believe ESG is an extension of the regular credit evaluation process. To orient our investment team with ESG and to develop that integration skill, we’ve had each of our credit analysts as well as the sector heads in municipals and in structured products complete a course offered by the PRI in responsible investing. This individual work course takes 10 to 15 hours to complete including a final exam requirement as well. Our analysts form their own opinions on how ESG factors will affect their credits and sectors, and use ESG ratings as a quantitative overlay for those opinions. One of the things that we have found ESG ratings can be very helpful is analyzing a large group of assets very quickly and uniformly. Also the commentary that comes from the ESG rating providers on individual credits can be useful as well. We think that there’s some value in ESG ratings, but they’re not the final answer.