Temasek and Swiss Re manage challenges posed by the climate crisis by reducing exposure to at-risk companies while actively engaging with firms that show serious intent to improve their sustainability practices.
Directors from the two asset owners shared their views on how they strike a balance in managing risks, the tools and techniques they use, greenwashing, and related environmental, social, and governance (ESG) issues during a panel discussion at Ecosperity Conversation held in Singapore on Wednesday (April 20).
“We set certain goals for ourselves in terms of which companies and which projects we’re happy to insure and we set the right path towards reducing our exposure to such industries,” said Karen Tan, Swiss Re managing director and head of life and health products for Asia.
For example, the Zurich-based reinsurer will be phasing out its exposure to thermal coal assets in OECD countries within the next decade, and thereafter in the non-OECD countries, she said.
Swiss Re also does not intend to insure or invest in new oil and gas plants except for companies that are committed to a net-zero target, she added.
“Because then we believe that the company is actually working on it (achieving the target) and setting their own path. We want to work together and be supportive and partner in their journey,” she said.
RISK MANAGEMENT – STRIKING A BALANCE
In making these decisions, Swiss Re hopes to use its role as a “risk-taker” to help promote ESG awareness and good practices among its insured customers and the companies it invests in.
Temasek's head of risk Robert Mainprize said that ESG risk, unlike credit risk, is not easy to quantify because of the lack of data and different methodologies used by ESG rating agencies, making the task of risk assessment challenging.
“So, if you have a company that’s very bad at social policies but extremely good at environmental policies, how do you add that up,” he said.
While he believes that data such as greenhouse gas emissions are useful as a gauge of a company’s ESG standard, engagement with its management could achieve more.
“The critical thing is to sit down and talk with the management of the companies we intend to invest in. Good management teams understand risks. When a company is aware of the risks and actually manages (the risks) … that’s a very good indication that you’re going to get a good outcome as an investor,” he said.
Given its huge portfolio, Temasek’s investment selection has to take into account various types of risks and it has engaged with the companies that need help in managing their ESG risks, he said.
GREENWASHING – INVESTORS’ PAIN
Mainprize said greenwashing – making false or misleading claims about a company or its products - is clearly a major issue faced by all investors, adding that “there’s some degree of correlation to companies that have a lot to hide on ESG” and the amount of money spent on investor relations.
He said Temasek – Singapore’s state investment firm – relies on several techniques to monitor information flow outside of standard disclosures including the use of artificial intelligence to monitor social media and news feeds for more insights on a company’s ESG practices.
“We track management action to see how they are walking the walk and not just talking the talk,” he said, reiterating the importance of keeping in close touch with the company’s leadership for warning signs.
As for Swiss Re, Tan says it deploys teams to “dig deep” into an insurance or investment company that it plans to collaborate with, adding that the company has a well-established framework to analyse its clients’ ESG behaviours.
“We look for external pledges on net zero, actions and activities (of the management) and also utilise external index benchmarks or research,” she said.
OPPORTUNITIES IN TRANSITION
The transition to carbon neutrality presents tremendous opportunities for businesses, said a report produced by Tsinghua University and presented by its lead author Sun Tianyin, who was also a panellist at the Ecosperity event that is part of Temasek’s series of year-round dialogues on sustainability topics.
Companies that actively manage ESG issues - such as adopting good climate risk analysis practices - and participate in disclosure initiatives will result in higher investor confidence and enhanced competitive advantage, said the report.
"Governments in Asian countries have already started to implement carbon-mitigation measures, including increasing the costs of carbon emissions and adopting renewable energy technologies. This will, in turn, affect the operations of related industries and companies," it said.
Such spending in countries will create jobs in clean-energy generation and energy efficiency development, driving growth in engineering, manufacturing, and construction.
Swiss Re is actively looking at renewable energy such as solar plants and offshore wind farms as investment opportunities even as it engages with these companies to understand the risks of new transitional technologies, said Tan.