The Power of ESG in Fixed Income Investment Decision Making at North American Insurers

Investment decision makers at North American insurance companies are likely to see environmental, social, and governance (ESG) factors as a way to inform risk-aware, economically sound decisions about fixed income assets. Whether through a highly structured approach or through more ad-hoc examinations, investment decision makers in a new study affirm the value of the information embedded in companies’ ESG practices and performance — especially in their corporate governance policies.

The prospect of upside in fixed income from especially strong ESG performance is met with less interest, and at times skepticism. Nonetheless, say investors, insurers are likely to increase their use of ESG in investment decisions in the years ahead and look forward to better information on ESG performance through improved reporting that is more frequent, uniform, and standardized. Over the long term, investors anticipate that climate change may eventually drive insurers to reassess their strategies for diluting risk through reinsurance.

These are among the high-level findings from In ESG, Governance Prevails, a new study from Invesco and the Institutional Investor Custom Research Lab.


Investment decision makers at North America’s insurance companies consistently consider ESG matters in their fixed income investment process, some using a formal, structured, methodical evaluation of environmental and social impact statements and disclosures, while others take a more ad-hoc, informal approach to ESG.

“We use a structured approach,” says the head of investment management at a Canadian insurer. He and his team work with asset managers using a process that he describes as both rigorous and consistent across investment opportunities. “On our side, we have the strategy, the target mix, and the overall policy,” he says, while the firm’s asset managers are charged with selection of individual fixed income securities viewed through an ESG lens.

The same investment manager views the ESG investment process of asset managers as a source of disciplined decision making. “’What’s a good ESG process?’ In my mind it is robust and consistent.” Such a process, he continued, ensures “you’re less prone to making a decision that missed out on opportunities and potential investments that are not aligned with the objective influence of ESG. If it’s ad hoc or inconsistent, period over period, there’s a risk that it will ultimately result in lower investment returns in the long run, whether through missing opportunities or embracing incorrect opportunities.”

Other investors call for an “informal, case-by-case” assessment of ESG information. A U.S. health insurer says, “Our bias is to keep our investment universe as broad as possible, with the understanding that there are certain industries, companies, and sectors that could generate significant negative headline risk” that in turn leads to risk of lower returns.

Insurers focus on the downside

While interest in ESG is likely to grow in the years ahead, it is clear that investors at insurance companies are most likely to use ESG factors as a means to reveal downside risk – as a negative screening factor. Since their portfolios are highly concentrated in fixed income assets, insurers are less likely than, for example, total return equity investors to enjoy the upside return of strong ESG performance. They do, however, bear the downside risk from poor ESG performance. Accordingly, investment leaders at insurance companies look to ESG analysis as sources of valuable information on the economic fundamentals of prospective investments.

Even investors who don’t explicitly embrace ESG performance as an investment criterion see value in the underlying economic analysis of some dimensions of ESG. The CIO of a $30 billion reinsurance company that outsources nearly all its asset management says, “We leave that up to our asset managers – if they have a view that something other than strict financial analysis will affect the value of the investment in the long term, then they will take it into account, subject to our investment guidelines, which have no explicit ESG limitations in them.”

While the same CIO is skeptical of ESG’s value as a discipline for fixed income investment, “there certainly are moral and other reasons to implement such a policy.” Only some of the economic factors he and his asset managers base their decisions on are revealed through review of environmental, social, and governance data. “Our managers are on the lookout for stranded assets. They are not going to invest in buggy whip companies or coal companies if they think the technology is changing. That reluctance isn’t as much about ESG as it is an economic credit decision.”

The social dimension of ESG is especially relevant to insurance investors when they examine sovereign debt and emerging market bonds. Says one CIO regarding sovereigns, “When you’re looking at either emerging market bonds or some frontier markets, a country’s track record on human rights and its attitude toward the treatment of women can be either a positive or negative performance driver.” As in other conversations, this CIO stressed the power of ESG to expose the downside risk of investment based on factors related somewhat tangentially to an individual bond issue. (CIOs may well be aided in their analysis of ESG and sovereign debt by the World Bank’s new Sovereign ESG Data Portal, which contains a vast array of performance metrics organized around the bank’s 17 sustainability themes.)

Investors voice both skepticism and patience with ESG as an investment decision making framework. The head of investment at a U.S. workers’ compensation insurer says, “We want to see more evidence that ESG is going to help, because at the end of the day we are managing portfolios. If an ESG framework can achieve a win-win regarding the portfolio and social and environmental responsibilities, we definitely want to look into it further.”

However, he cautions investors and their managers that if ESG criteria and negative screening are “too broad, they put too much restriction on the typical portfolio. On the upside, if a company can perform well economically, and at the same time have a positive social or environmental impact, then it is typically going to be more successful.” However, like other sources interviewed for this study, he is skeptical about the upside potential behind ESG analysis for fixed income assets: “There’s no magical distribution there.”

Due perhaps to a desire to preserve flexibility and to skepticism about the underlying economic value of ESG-informed decisions regarding fixed income assets, investors express some concern about the overuse of ESG information. “We’re already very highly regulated, and we have enough constraints without imposing more on our own,” says a health insurance CIO. The prospect of using an ESG overlay on the firm’s portfolio, he says, “didn’t get any traction with our management or board. We’re still not sure that significant outperformance is attainable by managers that have expressly implemented an ESG overlay.”

Corporate governance matters most

The survey underlying our new report, In ESG, Governance Prevails, reveals limited consensus on which dimensions of governance, social, and environmental practices are the most important to fixed income investors in the insurance industry. Respondents were asked to weigh in on a total of 18 factors – six in each of the main ESG categories, derived from the UN Principles for Responsible Investing and other sources – and to select the three ESG matters that are most important to fixed income investors. The survey includes responses from 100 CIOs, portfolio managers, and other investment decision makers at insurance firms in the United States, Canada, and Bermuda. In addition, eight investors contributed their detailed views on the topic through voice-to-voice interviews.

On matters of corporate governance, investors cited factors such as lobbying and political activities, executive compensation, quality of information and disclosures, and board composition as top concerns. Investors are especially interested in board size, board relationships with and independence from management, and the structures of both the nominating and compensation committees.

Investors also lament the uneven candor from issuers on governance matters. Says the head of investment for a large health insurer, “Companies are naturally incented to make themselves sound better than they really are – especially when it comes to governance. There isn’t any company that says, ‘We have a lot of work to do on our governance structure.’ The bad ones are typically unaware that their governance is poor.” The concern with governance is especially acute, he says, because “a culture of good governance isn’t something that happens overnight. The board has to be committed to implementing such a culture. Companies with strong governance structures are very clear what they’re doing to make it strong or strengthen it. Boards that don’t effectively address it are usually stacked with CEO founders, friends, and family.” Scrutiny of corporate governance transcends sectors and regions, and offers a view of the fundamental strength of a company’s leadership, according to one investor interviewed. The head of investments for a Canadian insurer says, “in our minds the G in ESG – governance – has always been predominant” even if social and environmental policies and performance garner more headlines. “There is no sectoral bias when it comes to governance,” he says.

Beyond governance, survey respondents most frequently cited social factors such as health and safety, diversity, and data use/privacy. A majority of survey respondents cited biodiversity, carbon emissions and climate change, and energy use as their top choices among the six environmental factors tested in the questionnaire.

The Road Ahead

Insurers currently draw on ESG information to improve their understanding of the risk and value of prospective investments. As the market for investment information matures with better reporting, more sophisticated research, and some forms of regulation, investors are likely to find new ways to make decisions that incorporate this information. Looking to the future, the question of how global climate change might affect the insurance business itself becomes increasingly important.

How will climate change affect investing, underwriting, and the business model of North America’s insurers? Not much, according to the survey, in which a majority of respondents say they expect climate change will have little or no impact on their firms’ underwriting decisions, investing, or business model in the next five years.

One head of investment says that the uncertainty of when and how climate change will affect insurance and asset markets is likely holding firms back from making major changes to the structure of their businesses. Gradual change “doesn’t force people’s hand to make major decisions. That’s what is frustrating to the scientific community. They’ve shown their data, but they don’t see anyone making any changes. It’s interesting from an investor’s point of view how the markets must almost be presented with actual calamity, as a group, to really do anything about it.”

Insurers focused on property and casualty lines may be among the first to respond to the risk of long-term climate change, suggest executives interviewed for this study. “I think climate change highlights the need to focus on reinsurance in the long term,” says the investment head at a Canadian insurer. “As weather-related events change in the long run, insurers have to ask themselves, ‘Is our reinsurance model working? Is it well equipped to handle the climate change that’s happening?’”

He cites the risk of local or regional natural disasters as an example, saying “From a tail events point of view, it’s catastrophes that could really hurt. Here in Canada, events where there’s flooding and huge amounts of damage in the Prairies, or wind and rain damage, would be especially relevant to home and other forms of property insurance.” He argues that the risk and liability tied to natural disasters “goes against the basic insurance model of diversification because you’re no longer working with the law of large numbers.” Under historical practice, he says, “if your underwriting practices are good and strong, the concept of diversification protects you from idiosyncratic or catastrophic events.” More frequent or severe physical catastrophes “will affect a bunch of homes in an area, and that’s where that diversification breaks down.” In response, he says, primary carriers may well need to reassess their use of reinsurance, through which they offload a portion of their liability through a third-party reinsurance carrier.

In the long term, say executives, reinsurers may well seek to alter their premiums and deductibles with primary carriers. “The reinsurance industry is going to look at the evidence and either increase the attachment point or increase their premiums,” for assuming a portion of a property and casualty carrier’s portfolio of risk, says another insurance CIO.

Health and life insurers seem less concerned about the direct impact of climate change on their businesses, at least in the near term. “I don’t expect we’ll have a lot of deaths here in the US from tsunamis or events tied to climate change,” says the CIO of a life reinsurer, “although, who knows – maybe in 20 years we’ll have lethal heat waves. But on the P&C side, or anything that’s weather dependent, like crop, event, or maybe maritime insurance, I can see having to be concerned about how climate change affects your reinsurance model.”

To obtain a copy of In ESG, Governance Prevails, visit

By Invesco
Peter Miller, CFA®, FSA, Insurance Research Strategist, Invesco Investment Solutions

Important Information
For Institutional Investor Use Only
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. This should not be considered a recommendation to purchase any investment product. This does not constitute a recommendation of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please obtain and review all financial material carefully before investing. Past performance is not indicative of future results. The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Diversification does not guarantee a profit or eliminate the risk of loss. Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities.

About the Study
In early 2019, Invesco and Institutional Investor’s Custom Research Lab surveyed 100 investment decision makers, including CIOs, portfolio managers, and investment committee members, among others, at insurance companies in the U.S., Canada, and Bermuda. All respondents work for companies with general accounts of $500M or more. To supplement the quantitative findings, we conducted a series of interviews with CIOs and portfolio managers at insurance companies in the U.S. and Canada. Survey participants experience may not be representative of others, nor does it guarantee the future performance or success of any product. The opinions expressed are those of Institutional Investor and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. There may be material differences in the investment goals, liquidity needs, and investment horizons of individual and institutional investors. Invesco is not affiliated with Institutional Investor. Invesco sponsored this survey.