The ESG (Environmental, Social and Governance) capabilities of insurers, particularly those that cover bulk annuities, continues to move up the priority list that DB Trustees are looking at when assessing buy-in and buy-out risks, according to a new report by Hymans Robertson. The leading pensions and financial services consultancy warns, that while it is good to see that Trustees are looking at this area, they must be sure that they have a critical understanding of the role of ESG when their DB pensions scheme is targeting buy-ins and buy-out, to gain full benefit for their schemes.

The report, Spotlight: ESG in Risk Transfer transactions, outlines four key areas of Responsible Investment that Trustees should use to assess a potential insurer with which to partner. These are: culture, integration, stewardship and transparency which, when considered together can help Trustees develop a longer-term view that was not necessarily encouraged by previous guidance.

Commenting on the growing impact of ESG within the Risk Transfer market, Paul Hewitson, Head of ESG for Risk Transfer at Hymans Robertson, said:

“A DB Trustee’s key duty is to act in the best interests of its members and, for those pension schemes targeting buy-out, part of that is to partner with insurers they believe can fulfil the responsibility of paying its members’ benefits long into the future. With the introduction of climate regulations, Trustees are now required to consider the risks and opportunities for their scheme that climate change will bring over appropriate short, medium and long-term time periods. Past guidance traditionally led to a focus on material short-term risks, and not necessarily explicit consideration of the longer-term impacts of ESG factors and climate change.

“As it’s likely that emerging risks like climate change could also affect insurers’ future financial strength, Trustees should take the time to understand how an insurer integrates ESG factors and climate-related risks into their standard processes and investment decision making. They can then compare an insurers’ approach with their own scheme's, which will ultimately help them to feel reassured that any risk transfer transaction will be in the best interest of members in the long-term.

“As insurers continue to focus on Responsible Investment factors and follow the recommended information disclosures, Trustees will have even more information to identify differences and benchmark potential partners. Insurers are making disclosures on things like the way they invest in socially beneficial projects and low carbon initiatives, how they reject investments involved in controversial activities, or how they actively engage with companies they invest in to drive positive changes from an ESG perspective.”