Our asset portfolio and ESG
Our approach to ESG and sustainability
Our £23bn annuity asset portfolio consolidates the premiums from our defined benefit and individual annuity policyholders and funds loans to our lifetime mortgage customers.
We consider environmental, social and governance factors (ESG) in all investment analysis and decisions for the portfolio. This helps to ensure assets are sustainable and will generate long-term competitive financial returns so we can meet the obligations of the policies we issue.
The returns generated enable us to offer competitive bulk annuity pricing and during 2020 we paid out over £1.3bn of retirement income to our policyholders.
Our environmental and social credentials are already evident in over £1bn of investments including:
- renewables such as offshore wind farms (Walney and Hornsea projects) and solar, in social housing and local authorities which have a positive social impact,
- small and medium-sized enterprises loans and to provide microfinance in emerging markets via agriculturally dominated commodity trade finance,
- in our October 2020 Green Bond, and
- through the exclusion of investments in tobacco and oil and gas exploration and production.
We’ve developed a sustainable investment framework which guides our current approach and future plans regarding ESG investing:
1. Be a UNPRI signatory: We were the first UK insurer to become a signatory to the United Nations Principles for Responsible Investment (“PRI”) as an asset owner.
2. Integrate ESG factors into our investment decisions: We run a partially outsourced model for our asset portfolio. ESG forms part of both the ongoing credit analysis and the formal due diligence process we employ to assess the suitability of the assets we manage internally and through our asset managers.
Each new opportunity is assessed to ensure it aligns with the principles of ESG and sustainability outlined below. We veto those opportunities that do not meet the criteria and wouldn’t normally invest in any opportunity that had a long term, negative impact on the environment or society.
We consider such assessment to be an essential part of sound fundamental credit analysis.
Sustainability of the issuer: The duration of DB liabilities is relatively long-term. So we consider whether the company issuing the debt will still be around to repay us when that debt matures; which could be over 20 years. We take into account the industry sector in which the issuer operates, the track record and decision-making skills of their management, the level of competition, demand for their services or products and the regulatory environment
Climate change threats: We’ve completed a stress test of our public rated bonds and the results were encouraging as the physical and transition risk impacts were limited. We’re integrating climate change analysis and reporting for our portfolio, not only to comply with the new standards requested by our conduct regulator the PRA, but also as a risk mitigation tool
To provide quality data to properly address and map these risks, we’re forming a long-term partnership with Carbon Delta who provide a comprehensive bottom up analysis on both single holdings and at portfolio level.
Brand impact: We consider whether the investment would negatively impact the brand image of our Group. We already have zero exposure to tobacco company bonds and controversial weapons. We’ve limited our exposure to gambling and will exclude companies who primarily use fossil fuel as a source for energy production.
Social standards: We will limit exposure to companies that have poor social standards by excluding those that take advantage of flexible labour standards or consistently violate applicable laws
Governance standards: We will limit exposure to companies with poor governance structures by excluding those with no policies relating to bribery, money-laundering and corruption.
3. Integrate ESG data into our investment decisions: We’ve subscribed to the MSCI ESG database to enable us to improve the ESG filtering process in respect of new investment, identify ESG red flags and review the back book. This publicly commits us to act in the best long-term interests of policyholders by ensuring we consider ESG issues as part of our investment analysis and decision making, our ownership policies and disclosure from asset managers.
4. Score and monitor ESG factors in our portfolio: We’re using the MSCI database reporting tool to score our liquid portfolio holdings on a regular basis and monitor the impact of new investments.
5. Apply a framework for restrictions and exclusions: We’ve established a flexible ESG management tool to help us consistently integrate ESG decisions in our investment process. It helps us identify where we should divest, exclude new investments or put companies on a watch list for ESG reasons.
We’re delighted our progress to incorporate ESG into our investment due diligence has been recognised by satisfying the requirements to become a constituent of the FTSE4Good Index Series in December 2019. The index is designed to measure the performance of companies demonstrating strong ESG practices.
How has ESG shaped our annuity asset portfolio?
Some of the larger investments influenced by our ESG and sustainability policy.
Significant initial financing of close to £150 million for the Walney Extension Offshore Wind Farm which is located off the coast of Cumbria. Its turbines are generating renewable energy for almost 600,000 homes in the UK. All construction risk was passed to Orsted, a consortium of six Danish utility companies that own and operate the wind farm and is majority owned and guaranteed by the Danish government.
We liked the investment because it was inflation linked (and therefore a good match for pension liabilities) and achieved attractive spreads with limited credit risk as a proportion of our investment had recourse to the Danish government.
Over £100 million in financing the construction of the Hornsea Offshore Wind Farm in the southern North Sea off the coast of Yorkshire. This is also operated by Orsted so benefits from some of the same protections enjoyed by the Walney financing.
Nearly £70 million in a loan to a Scottish social landlord. The funds enabled them to refinance existing debt and provide capital to build new social homes in Scotland. We’ve also invested £100m in loans to UK local authorities who will use the proceeds on a wide array of projects, among which as an example build, purchase or lease of dwellings to help minimise homelessness, provide foster care for vulnerable children and school meals for children from lower income families.
We’ve taken private placements in leading universities including Cambridge and Harvard – counterparties that we believe are sustainable and will therefore be around well into the future.
In making long-term investments there are always risks. We seek to manage these by looking at the security and protections offered and we ensure diversification.
When members know their pensions are funding such investments, this can drive engagement with their DB pensions. This is an area we hope more trustees are willing to explore when they secure a bulk annuity from us.
First UK insurer to issue a green bond
Just recognises that the UK insurance industry and the broader financial services industry have an important role to play in the transition towards more sustainable, lower-carbon economies; both through the products and services they provide and the financial assets they manage and choose to invest in.
In October 2020 we were the first UK insurer to issue a green bond. This £250 million offering, which was oversubscribed, aligns with the voluntary market standards of The Sustainability Bond Guidelines administered by International Capital Markets Association and inaugurates our recently established sustainability bond framework. This provides fixed income investors with an opportunity to support our vision to ensure that our investment portfolio has a positive impact on society and the environment.