Chief investment officers of China’s insurance companies have put ESG-compliant investments at the top of their asset allocation agenda for the next two years, shifting away from plain-vanilla financial securities, a recent survey found.
This trend has been driven by the issuing of green financing guidelines for the banking and insurance industries on June 1 this year.
Green bonds and green loans will likely become the most sought-after ESG-compliant assets, given that fixed income makes up the largest component of Chinese insurers’ portfolios, said James Peagam, head of global insurance solutions at JP Morgan Asset Management.
According to an insurance CIO survey conducted by JP Morgan Asset Management in conjunction with the Insurance Asset Management Association of China (IAMAC), over the next two years, 69% of Chinese insurers surveyed plan to increase ESG-compliant investments.
This is followed by asset-backed securities (ABS) and real estate investment trusts (REITs) (59%), private equity (55%), fixed income (55%), and public equity (48%).
“[The focus on ESG investment] does indicate some quite big changes that will come to the industry, not just the insurance industry, but I think the entire financial services sector will be impacted by this,” Peagam told AsianInvestor.
The survey was conducted between May and July of this year, and the CIOs interviewed oversee more than 75% of the Chinese insurance industry’s total assets. Life insurance companies formed the majority of firms surveyed.
As of end-June 2022, China’s insurance companies managed Rmb24.7 trillion ($3.4 trillion) of assets. Among them, Rmb22 trillion or 89% of the assets belonged to life insurers.
BIG ON BONDS
Since China announced its commitment to achieving carbon neutrality by 2060, the issuance of green bonds has been growing at a faster pace than non-green bonds.
Data from Wind and MSCI showed that China has become the world’s second-largest green bond market after the US, with a total balance of Rmb1.73 trillion as of the end of 2021, and a three-year compound annual growth rate of 37.8%.
However, Peagam thinks there isn’t enough issuance to satisfy all these insurance companies who are saying they want to add green bond exposure.
“The insurance sector is a big investor. They have a lot of re-investment that needs to happen in fixed income securities. And they're looking for ESG-compliant investments,” he noted.
“So that increases demand and in turn will have an impact on issuers to incentivise them to be compliant with green bond issuance,” he said, noting that the green finance guidelines set out by the China Banking and Insurance Regulatory Commission (CBIRC) will be the primary standard to be measured against.
Traditionally, the bond market in China has been short duration, but liabilities are longer duration, especially for life insurance companies. The survey showed that investors are investing in long-duration government bonds as one way to fix the duration mismatch.
In terms of the supply and demand of green bonds, the most desirable outcome is a duration that works for both the issuers and the insurance companies. For the latter, it helps with their asset liability management and therefore strategic asset allocation (SAA) objectives, he said.
As found in the survey, SAA has emerged as the capability that Chinese insurers are most focused on in terms of improvement. This marks a shift beyond current asset-only investment management to the development of a holistic view that includes investment research, ALM, and risk management.
Besides duration, the lack of quality assets in the domestic market is still seen as a paramount constraint for insurers in building out an SAA with diversified exposure.
In that light, issuers with high credit quality and long duration, especially in the corporate space, will likely become insurers’ top choices, Peagam said.
“It will be interesting to see if any of the ESG initiatives will also address that [asset quality issue] at the same time,” he added.
A GLOBAL COMPARISON
The survey also selected insurers across the US and Europe over the same period to gauge international differences, and their top priorities were discovered to be real assets, followed by ESG and private equity investments.
Differences were also found in the insurers’ approaches to ESG. Developed market insurers see ESG integration, impact and community investing as the most favourable.
In China, on the other hand, ESG investment is still at an early stage, with norms-based screening being the most used methodology. Norms-based screening is used against minimum standards of business based on international norms such as those set out by the United Nations and other non-governmental organisations (NGOs).
Despite the lag, the survey also showed that Chinese insurers are migrating away from exclusionary methodologies to approaches such as best-in-class and positive screening.