5 September 2022

ESG - A wonderful aspiration, but lacks maturity

Rip Reeves, Chief Investment Officer and Treasurer at AEGIS Insurance Services, explains why he is cautious of ESG even though he is 100% supportive of its goals.

Do you remember the first time you heard ESG or sustainability in the context of the financial industry or investments? And what did you think back then?

My immediate thought was, 'Oh, these this is the new term for sin bonds and stocks but a broader scope'.

Beginning in 1990, I managed money for pension plans, foundations, and health care plans. Given the mission and pubic nature of these mandates, it made complete sense there were frequent guideline prohibitions to buy sin bonds and stocks in their portfolios – which generally were alcohol, tobacco and gun related.

Looking at the client, what their mission was, it made perfect sense to me – very reasonable and appropriate.

One of the things that's been interesting to me over the years, is to hear some new acronym, like ESG, and realise we've been doing a version of this process for as long as I've been in the business. In this case, it was called sin bonds and stocks. It's just a new name, and the cynic in me thinks, 'now you can now charge more money to implement it'.

Rip ReevesSimilarly, 25 or so years ago I went to an S&P conference, and their agenda debuted ERM. I remember thinking that's a broader version of DFA and ALM modelling for the Enterprise. Many of our insurance companies were already looking at risk on the Enterprise level – but we didn't call it ERM. So, responsible companies were doing versions of ERM. Having said that, officially calling this risk assessment process ERM, and the increased focus on it, certainly sped its integration into the Risk Policy governance of the insurance business.

I fully suspect ESG will get there, it's just not there yet. Another observation, in my humble opinion, are the cultural and political forces at play providing a big tailwind to the adoption of ESG sooner than later. I believe these pressures are forcing some of my peers to implement ESG initiative "for show" and not necessarily because it's consistent with their corporate culture or mission.

What makes it not ready for primetime?

The analytical capabilities, approach to the exercise and assumptions are incredibly disparate at the moment. If I were to go to a dozen of our managers and ask for an ESG report on the portfolio they manage for us -- I would get a dozen very different reports. There are different models, different approaches, different assumptions and different prioritizations of ESG sensitivities altering one report from another. It's night and day how these reports appear. Ultimately I suspect most of the people reviewing these reports, have no tangible idea what it's really telling us.

The asset management and regulatory worlds are challenged just as we are in efforts to get their arms around a reasonable process and governance policy. Like with many new initiatives, it just needs some time to get a little more mature.

Implementing ESG investment goals can be a powerful tool in your strategy process and I 100% support it. However, to jump into products that don't have much of a track record so you can "check a box" seems short sighted for a strategic investor.

There's a bit of a chicken and egg situation - do you need these products to come to life and then create a track record and bring the whole topic to maturity?

There are other ways to be supportive of it.

One of the paramount things with insurance asset management is oftentimes we're making changes in the investment portfolio that don't necessarily have anything to do with increasing total return or income. Often, there are business priorities that need to be incorporated into the investment strategy, for example holding onto more liquidity/cash than you may want to in order to have liquidity to pay claims and operating expenses. So, this example would be an investment decision that is to support the business – our primary goal with the investment portfolio. I am often incorporating non-investment decisions in the strategy, so inclusion of ESG is another input to consider and incorporate.

One of the things that we've been spending a lot of time with is the coordination of many processes and governance policies, such as ESG, ERM, capital modelling and allocation, financial planning and ICM. I think the continued evolution of these significant tools/processes individually should be really interesting. More importantly, the coordination of these inputs in effectively and efficiently running our Enterprise will be fascinating! In 10 years, I will be very interested to talk with someone who's in my seat managing through this process.

For the past couple of years, we have been what I would characterize as 'ESG aware'. We have been providing ESG reporting on the portfolio to know where it stands versus market benchmarks. We have a handful of restrictions that are business oriented that actually help us on an ESG and ERM reporting standpoint. Current methodologies and ESG discussions seem to promote the ESG reporting process as simple, and it's not. It's not going to get there tomorrow, but it will. It just needs a little time.

What do you say to people that say we don't have time?

The reality is you're not going to make big, infrastructural changes tomorrow...it's not a reasonable expectation. Our first presentation of ICM/ERM output to Lloyd's I believe was in 2010. Our quarterly/annual reporting of these Enterprise policy risks have become standardized over the past few years. Again, it takes time to effectively implement "big, significant" topics and governance policies like ERM, ICM and ESG. The ESG initiatives individually are definitely in play, so the whole exercise will continue to evolve.

Besides time, what is needed? Because you embrace it but what needs to improve?

At the moment, it's almost like if the cart is before the horse. Usually, we can produce new products and strategies at a fast pace -- and the regulatory world is challenged to keep up. With ESG, the disparate reporting is an example of the need for some time.

Do you think your views are perhaps tainted by the fact that you are from the US and you're working in the US? Whereas perhaps, in Europe, people have been working on that for many more years, and maybe have more maturity?

That's a fair point. And that's why I've observed Lloyd's generally being at the forefront of the various requests for policies and procedures in our industry. No disrespect to anyone, but Lloyd's generally is the first to require inclusion in their reporting requirements.

What do you want to see in 10 year's time for whoever will be in your seat?

More uniformity of approach and coordination with other Enterprise governance policies. More standardization of the ESG process should allow more comparison of one mandate to another. It will also allow us to include ESG parameters in our Peer Analysis. I continue to believe the coordination of ESG with other significant Enterprise tools will be a fascinating experience. 

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