Finding a role for insurance asset managers in a sustainable financial system

Channels: SAA/ALM, Managers, Outsourcing, Risk, Regulation

Companies: Allianz Global Investors, BNP Paribas Asset Management, BaFin, Deutsche Bundesbank, CFA Society, Willis Tower Watson, Aviva, BlackRock, Moody's, S&P Global, Fitch Ratings, Brookfield Asset Management, Legal & General Investment Management

People: Prince Charles Philip Arthur George Prince of Wales, Elizabeth Corley, Helena Viñes Fiestas, Raimund Röseler, Will Goodhart, Steve Waygood

New report by the Prince of Wales Accounting for Sustainability project calls on all actors in the financial system to move as one on sustainability issues. Vincent Huck reports

The Prince of Wales Accounting for Sustainability project (A4S) in partnership with Aviva Investors has released a report looking at sustainable finance across the whole financial system in order to create a holistic approach amongst all stakeholders in the value chain.

Through a set of recommendations, the report explores how financial leaders can take action to move towards a sustainable global financial system that supports delivery of the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement.

It looks at the entire financial supply chain from asset owners to regulators through asset managers, consultants, banks, credit rating agencies, stock exchanges and securities regulators and companies.

The report has recommendations for each part of the investment chain to take in order to deliver a sustainable financial system.

This includes building a compelling evidence base and motivating people to act, developing consistent terminology, allocating funds to sustainable outcomes, adopting reporting standards, and pricing externalities. It also identified current actions already taken by actors across the financial system and the barriers to progressing further.

The publication comes two months after a finance leaders' summit, convened by Prince Charles at St James's Palace, where 70 chief executive officers and chief financial officers of organisations across the investment chain were asked their feedback on the recommendations.

A holistic approach with some gaps

Elizabeth Corley, Allianz Global Investors vice-chair and former CEO, who attended the summit applauds the report's consideration of the financial system as a whole.

"Very often there is a focus on what individual parts of the system can do, what I really liked about their approach is that it was holistic and thinking about how all the actors can play a role," she says.

Similarly, Helena Viñes Fiestas, head of sustainability research & policy at BNP Paribas Asset Management, says that although there isn't anything new in the report it does a good job at looking at the entire value chain and doing a sort of "literature summary of what is out there".

However, both Corley and Viñes Fiestas raised some questions on practical implementation. For Corley, the main issue is that the report does not identify the global organisations which are to oversee the application of the recommendations.

"The open questions are: where are those global institutions? Does this link back to the UN initiatives that are going on?"

She takes the example of the recommendation to establish a global research fund which can identify critical gaps and commission research to close those gaps from both the academic and investment research communities.

"Where does that get out from?," Corley asks. "How do you have good governance? How is it accountable? I like many of the ideas who were big and bold and global, but we have to think how they link back to global institutions."

For Viñes Fiestas the question mark is on the SDGs. While it is a good thing to have these goals as an overall framework, because it is a great marketing tool promoting what sustainable development is, and what are the interconnections and interdependencies between the different goals, but she has doubt on using them as a reporting tool.

"So far the SDGs have been more of a matching exercise rather than actually generating new finance going into specific goals or focusing on a specific issue," she says. "The role of investors SDG per SDG needs to be more clearly defined and take into account both the risk management and the positive impact."

Passing the buck

During Corley's interview, Insurance Asset Risk noted that often each actor in the financial system are quick to defer responsibility to another actor when it comes to sustainable finance or the integration of environmental, social and governance (ESG) criteria in the investment decision.

For example, asset managers frequently say they'll consider ESG if their clients, the asset owners, ask for it. And ultimately every actor is quick to point at the lack of regulation and that they will comply if such practices are made mandatory.

Asked if she agreed that stakeholders were quick to pass the buck and if the A4S report would help in curbing that practice, Corley says: "We've got a value chain that is quite long and quite fragmented and each part as a role to play."

"I'm not sure it is passing the buck, but certainly each actor will be thinking about their own duties, their own responsibilities and their own priorities," she continues. "So how do you form an integrated mindset across that value chain is absolutely at the heart of achieving change."

To realise this integrated mindset, Corley emphasises the need to find a common language to identify the problems and move forward.

However, initiatives to build such a common language are abundant, forming an ocean of acronyms not always easy to navigate: INCR, IIGCC, CTI, WBCSD, IIRC, GRI, GSSB, CDP, CDSB, SASB, TCFD... Does she think this is a challenge?

"I don't think it blurs the common understanding," Corley responds before referencing the proverb of the blind men and an elephant, where each blind man describes the elephant differently depending on which part they are touching.

"It is inevitable when you have a very rapidly growing area like sustainable finance, to get a huge of amount of exploration, creation and an explosion of new ways of doing things," Corley says. "Over time it will consolidate into more conformity. Where we are now we need to nudge towards standardisation without scuffling innovation."

Nevertheless, she believes the move towards sustainable finance should be industry led and not mandatory. "It is far better if is industry led because you will get far better implementation. Then you have the carrot and the stick, the stick is if you don't get there fast enough there will be policy intervention."

From a personal opinion which doesn't necessarily reflect that of her employer, Viñes Fiestas disagrees: "The challenges ahead are so big, like climate change, that we can't wait, we need a push."

She cites a study by BNP Paribas Asset Management which found that in the electricity sector European companies were ahead of counterparts globally in aligning themselves with the Paris climate agreement goals.

"The reason is not that Europeans are better, but the regulatory framework was the key driver," she says.


A4S report clearly emphasises the role of regulators and policy makers. Not only do they have their own chapter of recommendation dedicated to them, but the report also lays out specific recommendations for the regulatory powers in each of the chapters dedicated to the other actors in the financial system.

In particular, A4S says that few regulators currently utilise their ability to make a positive impact on sustainability issues.

Raimund Röseler chief executive director of banking supervision at German regulator, BaFin, who attended the finance leaders' summit tells Insurance Asset Risk: "I partly agree. It is obvious that regulators have only lately discovered sustainability as an important subject."

"However, it goes without saying that efforts to mitigate climate change should primarily be taken in the political sphere," he continues. "Yet, some financial regulators have started to engage in this field, for example in the context of the Network on Greening the Financial System, where BaFin and Deutsche Bundesbank are members."

Asked if BaFin has received a clear and explicit mandate from policy makers to incorporate relevant sustainability issues into their preservation of financial stability – one of the report's recommendation – Röseler paints a mixed picture.

"On the one hand, BaFin has the mandate to supervise all risks to the safety of individual institutions and the financial system as a whole, on the other hand there is no explicit mandate to incorporate sustainability issues in particular," he says. "Nevertheless, the absence of such explicit mandate does not mean that BaFin is prevented from duly taking ecological, social and governance risks into account."

Lack of skills

Another area the A4S report puts a lot of emphasis on is the question of skills, recommending that all stakeholders in the financial value chain address their capacity to deal with sustainability issues.

BaFin has established an internal project covering the supervision and regulation of banks, insurance companies and funds which partly address the question of skills, Röseler says. "Nevertheless, it could be necessary to expand our expertise in this area. In the future, it may be necessary to recruit climate experts, for example to assess the soundness of insurers' internal models on NatCat risks."

Another attendee of the finance leader summit, Will Goodhart, chief executive at CFA Society of the UK says growing sustainable skills and knowledge in mainstream finance is difficult because it requires to blend a number of different pieces of knowledge, guidance, behaviour and skills training.

The question of skills is very much on Goodhart's mind as he heads the working group on strengthening competence and confidence within the industry as part of the taskforce on Growing a Culture of Social Impact Investing in the UK chaired by Corley.

One of the difficulties is a lot of people have the traditional financial training, while others understand the social sector but to some extend those two sets of people have inhabited different world, he explains. "[They] now need to journey a little bit to pick up the knowledge they need from that other universe to be able to operate in a financial sector in which sustainability is mainstream."

To bridge that gap the CFA Society of the UK will launch an ESG investment certificate next year.

While A4S report argues for capacity building across all actors in the financial value chain, in the insurance sector, regulators have been particularly in the spotlight. Some like Aviva Investors chief responsible investment officer Steve Waygood have called on regulators to use all the tools at their disposal to address the risks climate changes pose to the financial stability of the insurance industry.

But others have argued that the European Insurance and Occupational Pensions Authority currently doesn't currently have the knowledge, skills and resources to do that.

"I think it is a bit unfair to pick on the regulators," Goodhart argues. "Do they need experts in investment topics, or do they need experts in understanding how to protect clients and promote competition at the same time? Probably the latter."

Regulators are not for instance required to necessarily being expert in designing multi assets funds to regulate, he continues, they need to be able to comprehend them and understand how they work but they don't necessarily need to be able to build them.

Investment consultants on the other hand are a bit behind, Goodhart says. "If there is one area where i think more experience and greater knowledge is necessary it is actually at the investment consultant piece in this value chain. Institutional money depends quite a bit on investment consultants and while there are some individual consultants and a number of firms that are very committed to this area overall i think that they are behind the curve and need to build those resources quite quickly if they are going to serve their clients well."

Capacity building is easier down at the larger companies, Corley notes, as they can do it through in-house training. That is why it is necessary to have initiatives such as the CFA Society of the UK or the CFA Institute continuous professional development in sustainable finance initiative.

The threat of a burden

The resource divide between large and smaller player is a worried shared by all interviewees. As sustainability becomes mainstream and standards and regulation emerge, there is a risk of creating extra burden for businesses. A burden the larger players might be able to weather, but not the smaller end of the market.

Corley is mindful that that many actors in the economy are small and medium size enterprises.

"So whatever we come out with, shouldn't be so burdensome that only the big can do it," she says. "That will spoil innovation, new entrances, the opportunities for SMEs to shape this market which they can do. we need to be thoughtful and proportionate of what comes out."

The report Financing our Future: Actions to scale up and accelerate the pace of change can be found on the A4S website.

Willis Tower Watson, Aviva, BlackRock, Moody's, S&P Global who were all present at the Prince's finance leaders' summit decline to comment on the report and its recommendations

Also, at the summit, Fitch Ratings, Brookfield Asset Management, Legal & General Investment Management, had not replied to our enquiry at the time of publication.