Conning's chief investment officer for Europe, Russell Büsst, explains how the asset manager is addressing environmental, social and governance risks (ESG) and its solutions in this area. He also shares Conning's insights on inflation risk
Why has Conning enhanced its ESG methodology to ensure insurance portfolios are fully climate aware?
We believe the risks related to ESG factors are significant over the long-term and present risks to our clients. Demand for companies to assess and monitor the potential impact of different ESG risks is gathering pace, and we expect a higher level of scrutiny on ESG-related issues from a variety of stakeholders. We believe that making our clients fully aware of the ESG risks in their portfolios and having the ability to manage that risk is both right and consistent with our fiduciary duties.
Conning has developed several tools to ensure clients can identify, measure, monitor, manage, control and report ESG and climate risk.
Portfolios can be customised based on preference to achieve ESG specific goals. These are typically client-driven and are applied during the initial portfolio construction phase of the investment process. For example, several clients have imposed investment guideline restrictions, enabling them to meet their obligations concerning exposure to thermal coal, oil sands and Arctic energy exploration.
We have fully integrated the evaluation of ESG risk in the bottom-up part of our investment process. Conning provides an ESG assessment for 100% of the corporate and municipal credits held by the firm with analysts indicating through our proprietary ratings whether ESG factors could potentially influence the underlying credit quality. Analysts also consider climate transition risk.
In recognition of ESG risks, we have developed extensive reporting capabilities including broad ESG, climate-specific and transition risk dashboards.
Finally, Conning's Risk Solutions group has developed a Climate Risk Analyzer™ tool that provides clients with cloud-based scenario analysis based on their own asset allocation. The tool combines climate stress tests with stochastic modelling from the award-winning GEMS® Economic Scenario Generator.
Why should insurers come to Conning for investment expertise?
Feedback from clients suggests Conning's appeal and competitive advantages are:
Insurance expertise and relationship with the industry – Conning understands the business of insurance, managing liabilities, and taking operating parameters and investment objectives into account. Capital preservation and liquidity to pay claims are a key consideration and regulatory requirement for insurers. Conning's investment processes are designed with the flexibility to suit the varied requirements of each client. Investment and operations professionals have either experience working in the insurance industry or have worked with insurance companies for a significant period.
Investment offering - Conning has developed a broad range of global fixed income and equity asset class offerings all managed within the same investment philosophy: capital preservation, client suitability, optimising risk-adjusted performance and capital management.
Investment modelling - Conning makes use of its market-leading GEMS® Economic Scenario Generator in order to assist clients with investment forecasts. We can provide clients with regular projections of their investments, illustrating both the expected path, but also detailed information on the up-side and down-side percentile risks.
Quality of client service – Conning's flexibility, responsiveness and professionalism have particularly appealed to small and medium-sized insurance companies.
In the current high inflation environment, what is Conning's investment outlook for the year ahead?
Bond yields have been rising with ever-increasing inflation outlooks as markets try to predict how central banks will respond to inflation becoming potentially more entrenched. For now, we believe the continued economic recoveries we are seeing in most developed economies, fuelled by near-zero interest rate policies, will take some slowing and that central banks will now focus on the inflationary concerns, putting growth concerns behind them as full employment is reached and pre-pandemic nominal GDP levels are exceeded.
Our belief is that trying to second guess the rates market over the next few years may not be productive, but we do believe economic fundamentals for businesses will remain positive for some time. So, to protect against the uncertainty of potential rate volatility, Conning has a bias towards minimising duration risk, whilst focussing on the 'carry trade', increasing yield levels wherever possible to offset potential mark-to-market volatility.
To this end, we are particularly focussed on less interest rate sensitive assets such as floating rate assets, namely CLOs and loans, as well as private markets and more esoteric structured transactions.
In addition, we continue to update our clients' strategic asset allocations to drive strategic and tactical reviews including assets that may have not, until recently, been considered.
How does Conning plan to develop its asset management capabilities for insurers?
Conning's objective has been, and continues to be, to help drive the profitable growth of our clients' businesses. Whilst underpinning our clients' financial objectives, we endeavour to target three key areas of internal development and investment: improving the delivery of existing services to our clients; increasing the range of asset classes available to our clients; and improving the efficiency of our internal processes and systems.
We continue to develop granular climate risk analytics and increase the scope of assets covered by ESG and climate risk reporting. We also continue to look for opportunities to increase the breadth of asset classes available to clients, for example, less liquid and alternatives. Finally, we continue to develop our software capabilities by leveraging the resources of the wider group.
