Asset Management for Insurers: State-of-the-art Sustainability Reporting

Increasing knowledge on climate change and potential economic impacts, (inter-) national initiatives by legislators and regulators, as well as the increasing convergence in the definition of sustainability within the insurance market, are determining the general conditions of sustainability more and more precisely. Nevertheless, insurance companies face several challenges in integrating sustainability into asset management.

In the last decades, sustainability has moved into the focus of regulatory intentions. The Global Reporting Initiative (GRI) in 2006, the definition of the Sustainable Development Goals (2015), the EU taxonomy reporting requirement (2021) and many other initiatives and regulations show that sustainability is changing the reporting requirements for companies in general, and insurers in particular. Moreover, more sustainability regulations are in the pipeline for the upcoming years (e.g. Sustainable Corporate Governance Directive, EU Non-financial reporting standards) and will confront insurance companies and their asset managers with significant challenges with regard to reporting.

Investment strategy breaks down ESG goals as defined by the corporate sustainability strategy

The regulatory requirements mentioned above have a direct impact on an insurer's investment strategy. Ideally, this investment strategy includes the definition of clear, measurable Environmental, Social and Governance (ESG) goals for the asset portfolio but is also aligned with the corporate sustainability strategy. Key Sustainability Indicators (KSIs) are necessary to measure and monitor these goals. Examples of KSIs are CO2-intensity, Water Usage, Recycling Rate, Corruption Index as a measure for transition risks, or flood exposure as a measure for physical risk. As such, KSIs enhance the existing set of Key Performance Indicators for portfolio management and add sustainability as an element of portfolio quality.

Sustainability reporting should address the internal and external stakeholders' needs

Internal sustainability reporting focuses on presenting these KSIs to the relevant internal stakeholders (e.g. Executive Board, Sustainability Managers) and distinguishes between performance-related, risk-related and inventory-related measures. For management purposes, one-page sustainability dashboards are used to display the most relevant KSIs, for example the ESG score for the asset portfolio and more specific measures such as Diversity Score or annual CO2 reduction. Topic-specific reports on asset classes or risk exposure by region or sector as well as analysis reports provide further information to support the sustainability dashboard.
External sustainability reporting complies fully with relevant regulatory requirements and reporting standards. For asset managers, additional requirements are also defined in the client's mandate.

Data requirements are influenced by the internal definition of sustainability as well as the structure of the asset portfolio

A consistent data model with all relevant KSIs supports sustainability reporting and facilitates process automation. The data requirements depend on external reporting requirements by the regulator and clients as well as internal management requirements and are strongly dependent on the portfolio structure. Relevant data is sourced from the internal ERP system, provided by external data providers and, where feasible, complemented by in-house research. The data sourcing strategy is currently an obstacle in sustainability reporting, but the fragmentation is likely to disappear as consolidation of data providers continues and data availability improves.
Various innovative tools exist for sustainability management and reporting, and there is no one-size-fits-all software solution. Standard reporting and business intelligence tools can be used; these have the advantage of easier integration with other solutions. In contrast, specific ESG reporting software may contain extensive databases and pre-defined sustainability dashboards. For asset managers, the challenge is to match the tool capabilities with their own portfolio and develop a suitable data sourcing strategy.
You are interested in examples of state-of-the-art ESG reporting solutions for asset managers and insurers? Feel free to get in touch.

Eggel, B. / Mägebier, A.