This is the second of a two-part column on green bonds. The first installment focused on bond sales.
Australian carrier QBE Insurance Group Ltd. has invested $190 million Australian Dollars ($148.42 million) in four green bonds in the last year-and-a-half, and it’s not stopping there.
QBE intends to invest up to $100 million AUD ($78.11 million) globally over the next three years in “suitable social impact bond opportunities,” said Gary Brader, QBE’s chief investment officer of group investments.
More interesting was what Brader had to say next.
He was asked hypothetically how he and QBE would react if insurance regulators in that country someday began to direct insurers to steer their investments into more climate friendly financial products like green bonds.
“I have heard some of the rumblings, but I think that would be a logical place for policy to go and we would welcome that,” Brader said. “We feel well-positioned to embrace that change and to support that change.”
So far no regulators in Australia, nor the U.S. nor Europe, have stated intentions to require insurers to make such investments.
Such an idea may be hypothetical now, but there is mounting evidence that some non-green investments may be at greater risk – and there seems to be a greater interest in looking at those risks on insurers’ books.
According to an updated report from global consulting firm Mercer, “Investing in a Time of Climate Change,” under several global warming scenarios modelled, climate change will inevitably have an impact on investment returns.
The report, which was released last week, states that investors must view climate change as a “new return variable.”
Using climate change estimates representing 2, 3 and 4 degrees Celsius warming scenarios, the report shows the average annual returns from the coal sub-sector could fall by between 18 percent and 74 percent over the next 35 years and between 26 percent and 138 percent over the next 10 years.
Conversely, the renewables sub-sector could see average annual returns increase by between 4 percent and 97 percent over a 10-year period and between 6 percent and 54 percent over a 35-year timeframe, the report states.
One beneficiary of these dire global warming scenarios is green bonds.
“Although still a nascent investment area, the green bond market is growing rapidly and, in time, could offer attractive opportunities to investors,” the report states.
It was an eye-opening report for Washington Insurance Commissioner Mike Kreidler, who chairs the National Association of Insurance Commissioners Climate Change and Global Warming Working Group.
Kreidler plans to ask Mercer to send a representative to speak to the committee when it next meets in Chicago in August as part of the larger NAIC meeting.
“The report focuses on investments and the strategies going forward with global climate change,” he said, adding that he believes “it would be valuable” to have a Mercer representative speak to the committee.
Because the report is just out, Kreidler said he is in the initial stages of reaching out to Mercer.
“I think it’s one of those things where we’re helping the industry by making sure that when we are looking at their investments, and a report like this breaks down where the winners and losers will be, it will help us ensure that they’re going to be on winner’s rather than loser’s side,” Kreidler said.
Could this lead regulators to start requiring insurers to invest in green bonds?
“It would be an exception for insurance regulators to go that far,” Kreidler said. “I think what is much more likely is we want to make sure those investments are going to be stable, they’re going to offer reasonable returns for the investment and it’s not going to be one that could compromise the financial stability of the institution itself.”
Cynthia McHale, director of the insurance program for Ceres, a nonprofit group that advocates for sustainability leadership, said the group has begun discussions with the NAIC to include climate change as a factor in the Financial Analysis Guidebook.
The guidebook provides regulators a framework for examining the assets and liabilities of insurers. The requirement Ceres seeks is similar to one already in the the NAIC Financial Conditions Examiners Handbook.
“We have suggested that their guides be updated so the analysts start to look more closely at the financial indicators of whether an insurance company is or isn’t looking at the climate change risk,” McHale said. “We have just started to have those discussions.”
Many insurers abroad are already bullish on green bond investing. Henri de Castries, chairman and CEO of French insurer AXA, announced in late May that the company was ridding itself of investments in companies most exposed to coal-related activities. This represents a $500 million Euro ($568.52 million) divestment.
The company has also committed to tripling its “green investment footprint” with the aim of reaching more than $3 billion EU ($3.41 billion) in investments by 2020.
The recent global debates over how to go about tackling climate change have signaled “a clear change in governments’ perception of the role financial actors could play,” de Castries said during a meeting with investors, which was put into a statement on the company’s website. “Finance is no longer seen as an ‘enemy’ of sustainable development, but rather as a key driver of the shift towards a low carbon economy. Finance is part of the solution.”
Zurich Insurance Group AG has made a commitment to invest more than $1 billion in green bonds.
Doing good may be important to the Swiss insurer, but Johanna Köb, a responsible investment analyst at Zurich, said the carrier is first-and-foremost looking for a good return on investment.
“This is not a philanthropy exercise,” Köb said.
However, having green bonds as an option enables the company to look at particular investment “buckets” and choose between investment opportunities that fulfill the same financial purpose as a traditional investment but allows the carrier to also do some good, she said.
“For us responsible investing is really doing well and doing good at the same time,” she said. “It’s why we think green bonds are an excellent opportunity for us to do that.”
Given the nature of the insurance business, the industry’s regulatory construct and its sophisticated ERM programs, insurers are uniquely situated to analyze and appreciate the impacts of climate change on their business.
That’s according to Alex Bernhardt, principal and responsible investment business leader for Mercer in the U.S.
“This said the challenge for insurers – and for regulators – will be to determine what short-term portfolio actions are warranted given the potential impact of climate policy, low-carbon technology and the implications of climate change risk on the physical environment,” he said.
Bernhardt said the Mercer analysis gives asset owners like insurers a construct to translate the impact of climate change risk into financial metrics, which can then be interpreted to help them establish a plan that allows for greater consideration of climate change in investment decisions.
QBE’s Brader sees a clear plan ahead for green investments. And although the political debate over climate change in Australia is comparable to and as heated as the fierce debate in the U.S. – deniers versus climate progressives – the carrier doesn’t fear backlash over its hardline stance on the issue, he said.
So far there has been none.
“There has not been a hint of a backlash among the feedback,” Brader said. “It’s seen as a positive.”
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