LCP finds insurers continuing to up their game on responsible investment and climate risk management

LCP’s third Responsible Investment review has revealed that bulk annuity insurers are continuing to up their game in relation to their responsible investment practices and climate risk management.

In our in-depth review, which we carry out every 2 years, we rate insurers on their ESG credentials allowing trustees and sponsors of DB pension schemes to incorporate Environmental, Social, and Governance (ESG) factors into their insurer selection decisions on buy-ins/outs, thereby managing ESG risks and helping to ensure member benefits are secure for the long term. Nine insurers* active in the bulk annuity market at the time of our review all participated.

Key findings from the review are:

• All nine insurers have now set formal net zero targets for their investments, with 2050 being the typical target year (up from 7 out of 8 active insurers at the time of our last review**).
• The net zero commitments are developing beyond the headline target and now typically include:
  • Interim targets. A 50% reduction in emissions by 2030 is the most common interim target.
  • Plans to engage with the highest emitters in their asset portfolio
  • Investments in “climate solutions” such as renewable energy.
• 7 out of the 9 insurers are signed up to the UK Stewardship Code as asset owners***. This is up from 2 out of 8 insurers at the previous review.

Future considerations

This is a fast-evolving area. LCP has raised the bar for our rating criteria at each of our reviews and will continue to do so in future. Insurers that do not keep up with the pace of developments will, therefore, see their scores decline.

Areas where LCP is calling for insurers to make further improvements include:

• With respect to net zero commitments, in our view insurers’ current approaches could be enhanced by setting explicit targets around forward-looking measures (for example % of portfolio that is aligned with net zero). We saw some evidence of this happening already, but it was not consistent across the board. Insurers should also extend their interim targets to cover 100% of the assets backing their annuity book, where this isn’t the case already.
• “Systemic stewardship” refers to activities that seek to address systemic risks such as climate change through using investors’ influence to change policy, regulation and industry practice. While the review found some examples of this, they were, in general, limited.

Tom Farrell, Partner at LCP, commented:

“I am encouraged by the progress made by insurers when it comes to responsible investment practices within their bulk annuity arms. There have been tangible improvements in areas where we engaged directly with insurers in our previous reviews, such as establishing robust net zero targets and signing up for the UK Stewardship Code. However, it is important to recognise that there is still a long journey ahead to effectively manage systemic ESG risks such as climate change. The insurers (and other investors) need to collaborate and continue to evolve and expand their efforts to stay ahead of these challenges to ensure effective management of these risks and the long-term security of members’ benefits.

“As a firm, we are committed to expanding our own systemic stewardship efforts. Throughout 2024, we will be increasing our engagements with policy makers and regulators with the aim of improving the security of member benefits in the long term whether they are provided by pension schemes, insurers or other alternative routes.”

Notes

*The insurers that participated in the review were: Aviva, Canada Life, Just, L&G, M&G, PIC, Rothesay, Scottish Widows and Standard Life.

** M&G did not participate in our previous review as it was not active in the bulk annuity market at the time.

 ***Note: it is possible to sign up to the UK Stewardship Code as an asset manager, asset owner and / or service provider. The above statistic relates to the asset owner category only. We do not give credit where an asset manager that is used by the insurer has signed up to the UK Stewardship Code.