Why did mobile phones become so necessary? Why did we stop posting letters and start sending emails?
Why did mobile phones become so necessary? Why did we stop posting letters and start sending emails? Why did we retire artisan coffeemaking and invent capsule-based espresso machines? The answer is simple: because they are convenient, and because we can. While mobile phones, emails and espresso machines have their detractors, many think the benefits greatly outweigh the costs. In much the same way, the pensions, insurance and investment worlds have embraced the environmental, social and governance (ESG) framework. However, it, too, has its detractors.
There are three important factors for its adoption: 1) some parts of society are sensitive to ESG considerations and demand that they are factored into the financial services they receive; 2) ESG may lead to better risk-adjusted capital allocation decisions; and 3) regulation increasingly requires ESG observance. Actuaries are often involved with some or all of the above. But are we doing it for compelling reasons, or is ESG just a fad?
The first of the points outlined above is a no-brainer for supply of ESG products: where there is demand, there will be a profitable business opportunity. The second is, in many cases, easy to spot; one only has to look at the annual reports of any large insurer or reinsurer to realise that ESG variables affect risks substantially. Regulation should just be a consequence of the previous two - but currently it is highly controversial, as policymakers seem inclined to take a one-size-fits-all approach that may bring little benefit to certain segments of the financial industry.
In this issue, we provide differing views on the topic. In our interview, Hilary Salt takes a broad view of integrated risk management for pension funds - while Nico Aspinall explains how investors, and DB pension funds in particular, could benefit from the ESG framework. Hopefully these views will help create an informed view among actuaries, and foster pragmatic debates.
Enjoy the read!