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Axa S.A.'s decision to eliminate its tobacco company investments is the latest use of socially conscious investment policies that have become common among large European insurers but have lagged among their U.S. counterparts.
Several of the largest European insurers have adopted environmental, social and governance, or ESG, standards to analyze not just the ethical effects but also the long-term risks of their portfolios. Fossil fuel assets have been a main focus of these standards so far: Axa, Paris-based Scor S.A. and Munich-based Allianz S.E. announced last year, for example, that they would sell off certain coal investments, with Allianz phasing out investments in companies that derive more than 30% of their revenues or that generate more than 30% of their energy from coal.
U.S. insurers, by contrast, place ESG standards relatively low on their list of investment considerations, according to a 2016 survey of global insurers by Goldman Sachs Asset Management.
“It has not been front and center in the industry,” said Catherine Seifert, an equity analyst with Standard & Poor's Corp. in New York.
This may be because U.S. companies sometimes wrongly conflate ESG principles with the divestment movements of earlier decades — such as the push to divest South African investments over apartheid — that ignored other investment criteria, said Alex Bernhardt, Seattle-based senior consultant with the responsible investment team at Mercer L.L.C.
ESG instead can function as a risk management system for investment portfolios, with divestment being only one of several possible actions, he explained.
In making its decision last month to sell off $224.5 million in tobacco company equities and run off its $1.8 billion portfolio of tobacco company bonds, Paris-based Axa cited the health and economic damage caused by smoking. The insurer said the move is in line with ESG principles it has integrated into its management of €552 billion ($613.55 billion) in investments and that previously led to its divestment of €500 million ($555.8 million) in coal-related assets.
While a tiny fraction of its total holdings, Axa's tobacco investments are among the largest held by global insurers, said Robert Hartwig, president of the Insurance Information Institute Inc. in New York.
“The vast majority of insurers would have less, and most companies substantially less, than the $2 billion that Axa has,” Mr. Hartwig said.
Fossil fuel investments, though, have been a larger concern than tobacco for advocates of ESG guidelines, industry sources agree.
U.S. insurers are large energy investors and face significant “carbon asset risk,” according to a report last month from Boston-based nonprofit sustainability group Ceres and Mercer.
Forty U.S. insurance groups analyzed in the study hold $459 billion in fossil fuel company bonds and equities, including $237 billion in electric/gas utilities, $221 billion in oil and gas companies and just under $2 billion in coal companies.
Along with bankruptcies and rating agency downgrades resulting from the slide in energy prices, these investments face “stranded asset risk” as energy producers are forced to leave oil, gas and coal in the ground during a transition to cleaner energy sources, and litigation risk over alleged failures to disclose climate change impacts of fossil fuel consumption, the report warns.
The Ceres report urges insurers to make climate change investment risk a board-level governance issue, evaluating overall portfolio risk along with the suitability of individual high-risk assets. Insurance regulators should also require companies to disclose fossil fuel investments, Ceres recommends.
Earlier this year, California Insurance Commissioner Dave Jones called on insurers licensed in the state writing more than $100 million in direct premiums nationwide to provide data regarding their carbon investment exposures and to voluntarily divest coal-related assets. He set a June 1 deadline for insurers to respond to the coal divestment request, and several insurers have said they intend to divest, according to the insurance department.
Whether other states follow suit remains to be seen. Regulators in many states lack the statutory authority to compel divestment of particular assets, a spokesman for the National Association of Insurance Commissioners said. The NAIC itself is unlikely to take up the issue, he added: “There's no consensus on that, and the NAIC would only get involved if a consensus exists.”
U.S. insurers generally are less likely to consider ESG investment principles than insurers in other parts of the world, according to Goldman Sachs Asset Management, which surveyed 276 insurer chief investment or chief financial officers earlier this year. Among North and South American respondents, 61% said ESG principles are not a primary investment consideration, compared with 52% of respondents in Europe, the Middle East and Africa and 36% in Asia-Pacific countries. Only 15% of respondents in the Americas said ESG was one of several investment considerations, compared with 34% in EMEA countries and 52% of Asia-Pacific insurers.
The III's Mr. Hartwig said that insurers have a fiduciary responsibility to policyholders to maximize investment returns in order to hold down insurance rates. While ESG principles currently discourage fossil fuel investment, in the future they might discourage investment in nuclear, hydroelectric or even wind power because of negative environmental effects of those technologies, he said.
“It's a slippery slope,” Mr. Hartwig said. “There's literally no end to this.”
But John Goldstein, a managing director with Goldman Sachs Asset Management in San Francisco, said investment managers can square sustainable investing goals with portfolios that match or attempt to beat market rates of return. He cited New York State's Common Retirement Fund, which worked with Goldman last year to create a $2 billion “low emission index” fund that underweights investment in companies with high carbon profiles and overweights low-carbon emitters while matching broad market performance.
Investors can also pursue “impact investing,” providing direct funding in private markets to companies tackling environmental or social problems, and use the power of their holdings in public companies to push those companies toward more sustainable practices.