The UK’s insurers alone hold over £1.8 trillion in invested assets, plus there are many trillions more managed by investment firms and banks. At the moment, only around 1.2%* of all assets under management in the UK are invested in greener projects such as renewable energy, collectively known as ESG (Environmental, Social and Governance) Assets.
A number of obstacles prevent insurers and other asset managers from increasing this proportion, most notably:
There is a shortage of high-quality and consistent ESG data throughout the financial system, making it difficult for investors to either manage their exposure or identify the best opportunities for green investment.
With its focus on a one-year solvency measure, the current prudential regime for insurers doesn’t adequately reflect the long-term nature of insurance. The Solvency II rules effectively disincentivise insurers from investing in the kind of long-term, sustainable projects that could help mitigate the impacts of climate change.
The Association of British Insurers (ABI) is proposing ways to address these issues in a consultation response to the Prudential Regulation Authority, while also supporting proposed FCA guidance to increase the consistency and comparability of climate change related financial disclosures.
On data availability, some insurers are developing their own approaches and specialist teams but it’s feared a piecemeal approach will take an unnecessarily long time. Instead, the ABI says there is a role for the regulators to play across the full breadth of the financial sector to help improve the availability and consistency of data relating to the firms and initiatives insurers may want to invest in.
Regarding the regulatory regime, the ABI is proposing more is done to take sustainability factors into account when considering assets, particularly given the good match between longer-term investments and insurers long-term liabilities. Enabling this should be a key focus of the Solvency II 2020 review which is just getting under way, and is something the UK could take steps on independently once we leave the EU.
Steven Findlay, Head of Prudential Regulation at the ABI, said: “Insurers are more aware than most of the increasing threat posed by climate change, given they are in the business of identifying future risks and working out how best to mitigate them. When extreme weather events happen, they are at the forefront of picking up the pieces. As a sector which holds over £1.8 trillion in invested assets, they are also in a unique position to be able to seriously boost new, greener technologies and energies. They want to be able to do more of this, and it is very encouraging that the PRA shares these goals.
“Moving our world towards a lower carbon economy is in the interests of everyone, which is why we are setting out some steps to help unlock billions of pounds of investment for innovative, greener projects. But we have to be practical about what will make a difference. Those responsible for managing assets need to be able to demonstrate to their boards and their shareholders that greener investments are good for their balance sheet, not only the planet. The industry, through initiatives like the recent ClimateWise Transition Risk Framework, is already taking positive action; regulatory changes to give insurers more freedom to invest in sustainable assets would also be a step in the right direction.”
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