APAC insurers take to climate transition, private market investment strategies

October 17 2024 by

There is a near consensus among insurers in Asia Pacific on their commitment to climate transition in their asset management strategy as well as on increasing their allocation to alternative investments, according to a report by BlackRock.

“There is almost a 100% consensus on increasing allocation to alternatives and a step change in Asia Pacific insurers’ commitment towards transition investment and insurers are also seeing a growing strategic role in financing the infrastructure gap, especially in the emerging markets,” said Kimberly Kim, head of financial institutional group, APAC for BlackRock.

In a divergence from global trends, majority of regional insurers expected the economy to stay resilient and wasn’t expecting any landing with core inflation and interest rates expected to stay. Globally, central banks are carefully easing, and insurers are anticipating a soft landing, according to BlackRock’s annual Global Insurance Report that surveyed 410 insurance investors surveyed across 32 markets.

However, Kim noted that regional insurers identified “regulatory changes and geopolitical tension as the macro risk for the sector.

“Insurers are dealing with this rates environment, which is compounded by different issues like regulatory and political uncertainty, escalating to geopolitical tensions, which came out quite strongly in the report,” she said.

Energy transition
Notably, 99% of insurers in APAC surveyed for the report have some form of transition objective in their investment portfolio.

“We are observing that the insurers have very ambitious climate transition goals. Of course, there are opportunities and challenges that they face. They are paying extra focus on renewable energy like wind, solar, energy storage because these investments are aligned with their net-zero targets and also support the transition to low-carbon economy.”

“Insurers are also more actively engaging with companies to encourage better climate related practices and policies, include voting on the climate resolutions and taking proactive action through the stewardship.”

Kimberly Kim, BlackRock

“In Asia, almost two-thirds of insurers told us that they had more conviction in transition investing than they did a year ago. We see that there’s a lot of momentum in this,” Kim said.

There is also growing allocation to green bonds, which help insurers to meet their sustainability goals while providing the stable return.

“Insurers are also more actively engaging with companies to encourage better climate related practices and policies, include voting on the climate resolutions and taking proactive action through the stewardship,” Kim said.

However, investment continue to be going to the US and Europe given the more mature markets there, said Kim, adding “we need to see more opportunities coming from emerging markets or Asia”.

To support their low-carbon transition strategy, clean energy infrastructure such as wind and solar (60%) and technologies such as batteries and energy storage (60%) were identified as the top two thematic areas that insurers plan to target, according to the report.

In places like Australia, there are significant opportunities that makes a lot of sense for insurers, she added.

Certain regulators, notably in Singapore and Japan, have been very proactive in promoting and encouraging green investments, Kim noted.

“One of the biggest challenges is the lack of reliable and consistent data on things like carbon emissions. Insurers definitely need accurate data to measure their progress and make informed choices,” Kim said.

“We also hope to see standardisation of industry metrics, which is crucial for effective decision making. Different ESG rating agencies use varying methodologies, making it sometimes difficult for insurers to compare and prioritise investments.

Private markets
The report noted that there is rapid acceleration in demand for private markets among insurers in recent years, notably in Asia Pacific.

“We have also seen the increased allocation to private investments for diversification as well as need for increased income generation,” Kim said, adding that 96% of APAC insurers said they will increase investment in private market compared with about 91% globally.

Implementation of risk-based capital (RBC) regimes have also helped with the shift towards private markets as under that regime certain asset classes like private debt are relatively very attractive

“I  think it really is a strong reflection of their belief in the benefits of diversification And higher income generation that private markets offer

“There’s also heightened focus on private debt. So the they’re shifting our allocation from public fixed income to private debt. We believe that the shift will come from public to private fixed income because it provides high higher yield and the diversification benefits compared to traditional fixed income.

“The higher rate environment has been a tailwind for private credit investors because they can achieve equity like returns,” Kim said.

The transition from banks to private lenders on the back of banks deleveraging, the insurers and asset owners  are playing a big part and very importantly they recognise that they will get to finance the real economy – consumer financing, energy transition, right, that requires huge capex, she added.

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