Blended finance and sustainability: AIA Singapore seeks more certainty
Life insurance companies would need to be assured of supply and risk-return assumptions before entering into sustainable projects with blended finance structures, according to AIA Singapore.
Traditional investment metrics on return, underlying risks, and the capital charges of a project could be less efficient over the long term for innovative finance structures such as blended finance, which could trigger doubts over the return prospects, said Liu Chunyen, chief investment officer of AIA Singapore.
“For life insurance companies such as AIA, most of us look at very long-dated liabilities. Although you would think that matches with projects of this nature very well, it means that we would need a very stable pipeline of investable projects,” Liu told a panel discussion of IMAS-Bloomberg investment conference earlier in March.
“That could be one of the reasons why we haven't seen blended finance type of projects taking off in the life insurance industry,” Liu said.
CHASING RETURN
Blended finance is a new funding structure used in projects with sustainable development goals (SDGs). It uses public funds to carry out the preliminary construction or funding of the project, and then introduces private capital when return becomes more predictable, in a way that reduces risk and attracts private capital investment.
Liu believes a good project must be accessible and transparent - which means the structure is straightforward - providing a constant supply in the pipeline. Meanwhile, it has to be clear to the investors as to what the underlying risks are and that the information is readily available whenever needed.
“I think those basically represent investment projects that we are looking for that will really bring us over the line,” Liu said.
She thinks a lack of understanding and established metrics for the funding structure is preventing life insurance from actively participating in blended finance projects.
“We have different stakeholders looking at different value creation metrics. So, to optimise all different sets of metrics is not easy. It's a balance of all these,” Liu said.
“Traditionally, how insurance companies look at any investment (is to) look at the risk-adjusted return, i.e., it has to be capital efficient,” she said. “This is still the core metric that we're looking at in our planning of capital deployment.”
CHANGE OF MINDSET
She noted that to bring a new type of investment onto the balance sheet means to change the mindset and manage return expectations of shareholders, as well as to change product pricing if necessary and manage the expectation of consumers.
Under the risk-based capital regime in Singapore, conversation with auditors and regulators is also needed to understand the underlying risks and capital charges, she added.
“So that operational readiness is actually a tremendous amount of work,” Liu said.
“I think the key mindset change is that we are investing for the future. We can't just use the current return metrics to look at this type of investment, that would not be fair and comprehensive enough going forward.”
Liu noted that the financial industry, including life insurers, have not spent enough time collectively to figure out how to bring sustainability or ESG investment considerations into current return assumption models in a way that would direct investment strategies and insurance product pricing.
“If we use traditional metrics, (it can be) really hard to find so-called investible or attractive deals,” Liu said.
The first step would be to have sufficient communication and education, so that both investors and shareholders understand the underlying risks and the long-term outcomes. This part of engagement has to be across the whole company, not just investment and finance departments, she said.