In this blog, we talk to Claire Jones, the Chair of the IFoA’s ESG Investment Working Party, to find out more about ESG factors and why they are important to the actuarial profession.
Environmental, social and corporate governance (ESG) issues are increasingly acknowledged as important, mainstream investment considerations. Why?
Traditionally, environmental and social issues were seen as “non-financial” factors and only relevant to investors who wished to invest consistently with their ethical principles. However, many investors now realise that ESG issues have much wider relevance. There are lots of examples of ESG issues which clearly affect financial returns and can be material. Look at the shift to low-carbon energy generation and the effect it’s had on US coal producers and German utility firms. Or the importance of providing a good working environment which will attract high calibre staff who are motivated to do their best work. Or the damage that corrupt business practices can do to companies’ reputations, triggering hefty fines and loss of revenues. Why wouldn’t you take these factors into account in investment decisions?
ESG factors are not captured well by traditional investment processes because they tend to be longer term and harder to quantify. Investors are increasingly realising that incorporating ESG factors can provide opportunities to improve risk-adjusted returns. Moreover, organisations such as the Law Commission have clarified that taking account of ESG issues is consistent with investors’ fiduciary duties and, indeed, is required where these factors are financially material. We are now seeing a snowball effect due to influential mainstream organisations – such as the Bank of England, Financial Stability Board, European Commission and the UK Pensions Regulator – highlighting the importance of ESG issues.
Why do you think ESG factors are important for the actuarial profession?
If investors – who are often actuaries’ employers or clients – ignore ESG factors, this will lead to worse long-term outcomes for the economy, society and environment. It is in the public interest for actuaries to take account of ESG factors in their work and for the IFoA to speak up on ESG topics.
For example, investors can and should be doing more to address climate-related risks and opportunities within existing investment rules. However, this won’t be enough on its own. The current framework encourages – and arguably requires – investors to think of climate change as an external source of risk for them to manage. But it does not acknowledge that investors have an influential role in determining whether or not we meet the internationally-agreed goal of keeping global average temperature rises well below 2oC. The IFoA can encourage policymakers and regulators to enable, encourage and require investors to act consistently with this 2oC goal.
What role should actuaries play in ESG activity across the investment industry?
There has been a significant rise in ESG activity across the investment industry, but actuaries are under-represented. There is a great opportunity to raise the profile of actuaries and demonstrate how we can add value. Many ESG discussions focus purely on the implications for assets, ignoring the impacts on the associated liabilities. Actuaries are the obvious people to highlight the liability angle and explore the correlations between asset and liability impacts.
What tends to be missing from investment processes is top-down analysis of macro trends and portfolio risk exposures, and inclusion of ESG factors in asset allocation modelling. The last of these is still in the “too hard” box. But it means that our models may not be good representations of the real world and this may lead to inappropriate outcomes. In other words, our models may not be fit for purpose in a world in which ESG factors are becoming increasingly important and interconnected. Actuaries should consider the appropriateness of the models they are using and work to improve them as necessary. ESG factors are less amenable to quantitative analysis than traditional investment factors, but this is not a valid reason for ignoring them.
The IFoA has recently become a Network Supporter of the Principles for Responsible Investment (PRI). Why do you think it is important for the profession to support the Principles?
Becoming a Network Supporter recognises the role that the IFoA can play in raising awareness of the importance of ESG factors through its education and CPD activities, and in developing ESG practices through its research and thought leadership activities. The IFoA has been doing these things for a while, but becoming a Network Supporter raises their profile and makes a public commitment to continue them.
You Chair the IFoA’s ESG Investment Working Party, which has actuaries and non-actuaries as members. Why do you think it is important for the IFoA to work with others on ESG activity?
As I mentioned earlier, actuaries are currently under-represented in the significant ESG activity that is taking place across the investment industry. As we get involved in ESG issues, we should learn from others rather than starting from scratch. At the same time, we can bring a valuable perspective that may otherwise be missing. After all, a large part of ESG discussions is about long-term risk management. This is a core part of the actuarial skillset!
If you could have one call to action to other actuaries related to ESG, what would it be?
Get informed and get involved! This applies to all actuaries, not just those working in investment.
ESG covers a wide range of topics. It is a fast-moving and fascinating area. For most of us, it wasn’t covered in detail at any stage of our education – and much has changed in the last decade or so. There is lots to learn.
The IFoA has recently become a Network Supporter of the Principles for Responsible Investment (PRI), a UN-backed organisation which works to understand the investment implications of ESG factors and to support its international network of over 1,750 signatories incorporate these into their investment and ownership decisions.
Find out more
Sign up for the IFoA’s monthly Resource and Environment Newsletter
Join the new Resource and Environment Member Interest Group which will provide study groups and an online knowledge hub
 See, for example, https://www.weforum.org/reports/the-global-risks-report-2017
 Network Supporters are non-profit peer organisations that would like to publicly express support for the PRI within their constituency, raising awareness within the investment community of responsible investment and the PRI.