How to bring impact investing into your portfolio
Jamie Broderick, Deputy Chair and Lead Expert at the Impact Investing Institute, discusses how insurers can effectively integrate impact investing into their portfolios.
Andrew Putwainposted on Tuesday, October 18, 2022
Andrew Putwain: Insurance can be conservative when it comes to change especially around financial conduct. What would you say to those that are hesitant to embrace impact investing and other sustainable actions?
Jamie Broderick: If you've got a conservative group of investors, then shareholder engagement with existing, conventional equity holdings is not a radical investing approach - it is consistent with existing standards of stewardship by asset owners, is well established and has been demonstrated to improve business practices, as well as improve the financial performance of companies.
A common obstacle is that people expect sustainable investing to be more completely formed than it is: it is an emerging investment area and when you look at other aspects of financial investing, they took decades or generations, particularly in financial accounting, to develop.
"This change is about applying an “impact” lens to their activity. There are insurance companies doing this and have been explicit about their commitment to impact investing."
In order to embrace an impact investing approach, you have to move beyond that and expect that you have enough information to proceed even without everything being perfect.
The main message I would give to insurance companies, which are also highly regulated and that's one of the significant constraints - I wouldn't blame it all on conservative actuaries - is to understand that they are already investing in the areas where impact occurs.
This change is about applying an “impact” lens to their current activity. There are insurance companies that are already doing this, and some have been very public and explicit about their commitment to impact investing. These insurers have incorporated impact strategies within the norms and constraints that they have as institutional investors.
It's hard for people to understand that the pioneering has been done.
Now, if you're an insurance company the question is: how might this same frame of mind apply to my company? They need to be shown that they’re investing in asset classes that they know and understand and are already committed to but are now putting attention on options for investing that are explicitly adding social or environmental value.
Andrew: Reporting and compliance can be a complicated procedure for sustainable investing. How would you recommend mitigating this as a hurdle?
Jamie: The recording of sustainability relies on novel and emerging management methodologies and in many cases, incomplete data too. It hasn’t been perfected yet and much of it is untested, and the available amount of data is less than people want.
"There’s also a growing ecosystem of specialists in this area that can help with reporting. My recommendation to an organisation is not to try to reinvent the systems on their own."
But the level of data is improving constantly. There’s an enormous amount of focus on this and it will improve. Here, as elsewhere, though, you’re not going to get 70 or 80 years of complete financial, environmental, social, and governance data.
There’s also a growing ecosystem of specialists in this area that can help with reporting.
My recommendation to an organisation is not to try to reinvent the systems on their own because it's evolving too quickly. There is lots of reporting for other fields that you can do inside your organisation because the practice has been established and everybody knows what it needs to look like. But in novel and emerging methodologies such as sustainability, it's helpful to get external advice and there are plenty of consultants offering their services in this area.
Andrew: Would you recommend companies pursuing voluntary frameworks too as a way of showing intent and their brand?
Jamie: You need to get your regulatory compliance in first, there's no getting around that. There is scope for participation in the more creative process of the voluntary guidelines, and I don't see those two things as incompatible.
There's a creative challenge and tension between those two things; you have regulatory compliance, and you have people that are trying to be aspirational about what they can deliver. They then challenge the regulatory compliance and then there's a conversation back and forth in which you find what the optimal combination of those two things is.
It's healthy for people to challenge regulatory compliance. It is an emerging area and we're seeing that the regulators themselves are challenged and trying to figure out how to make this area natural and consistent with regulation.
Andrew: We often hear plans being watered or dialled back or diluted. How would you advise organisations around this?
Jamie: It’s helpful to start modestly and learn from that experience before you attempt to scale things up. This has been the normal pattern.
"For an insurance company that is also integrating sustainability into its insurance and investment products, clients need to be consulted and educated."
The most important thing if you're trying to avoid falling back is to engage all of the stakeholders in the process: your investment professionals, the board, senior management, your regulatory supervisors, your employees, your external advisors - all these groups need to be educated on sustainable and advanced investing.
For an insurance company that is also integrating sustainability into its insurance and investment products, clients need to be consulted and educated. It is about engaging all stakeholders in the process.