Demand for green and sustainable assets has grown quickly in recent years, driven by stakeholders that are widening their focus beyond pure financial returns and towards broader ethical goals, said AM Best. In response, the market has developed a number of products such as sustainability-focused mutual funds, indices and green bonds.
Issuing green bonds allows insurers to access a new investor base that might not have been available otherwise. In addition, national efforts to accelerate green initiatives could provide incentives for green bond issuers. A further benefit of green bonds is the likelihood they will enhance a company’s public image through its green credentials. Insurers that have issued bonds to date have large retail operations and are keen to boost their brands’ perception and goodwill, particularly where insurance products are viewed by consumers as commoditised. In some markets, companies perceived as being out of line with public concerns about climate change may be subject to reputational risk.
In Europe, insurers – particularly some of the major players – are already playing a vital role in the development of sustainable finance, investing in ESG assets as part of their large global asset portfolios, said the report. Renewable energy projects have also become a fast-growing share of total issuance of infrastructure debt.
Furthermore, to match the duration of their long-dated liabilities, life insurers need to invest in correspondingly long-duration assets, and allocations to green and sustainability-related infrastructure projects satisfy insurers’ needs for duration-matching and diversification in their portfolios.
In the US, the municipal green bond market is small, but with more states such as California becoming more proactive, the market will undoubtedly grow. Property/casualty insurers have larger allocations to municipal bonds and bond insurers such as Build America Mutual have launched initiatives such as Greenstar to identify municipal bond issues related to infrastructure projects with environmental benefits.
In November 2017, Manulife Financial Corporation became the first life insurer to issue a green bond of S$500m in Singapore. In recent months, Sun Life Financial in Canada issued a CAD750m sustainability bond, while Assicurazioni Generali of Italy became the first European insurer to tap the sustainable financing market when it issued a EUR750m green bond.
Although insurers currently account for a very small proportion of the total issuance of the ESG bond market – $121bn in green bonds were issued globally in 1H2019 – AM Best said that given the strong reception these issues have had, other insurers around the globe may begin issuing more such bonds. M