Investing July 16, 2020

Insurers Report Negligible Long-Term Changes to Investment Strategies

The firms—which have similar investing goals to DB plans and back investments included in some DC plans—are continuing a move to private assets.

Reported by

It has been said that defined benefit (DB) plans can learn from insurers’ investment strategies. And it’s important for defined contribution (DC) plan sponsors to understand how insurance companies are faring in the current market, as insurance general accounts back certain DC plan investments.

The annual Insurance Report from Goldman Sachs Asset Management (GSAM) reveals the investment strategies insurance companies are using, their thoughts about environmental, social and governance (ESG) investing and exchange-traded funds (ETFs), and hurdles companies encounter related to ESG investing.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

During a video discussion, Michael Siegel, global head of GSAM Insurance Asset Management, explained that GSAM typically surveys chief investment officers (CIOs) and chief financial officers (CFOs) at insurance companies right after the beginning of the year. This year’s survey included responses from 273 CIOs and CFOs representing more than $13 trillion in assets—half of the global insurance industry assets.

However, four weeks after the close of the survey, the World Health Organization (WHO) announced a pandemic, and some responses seemed no longer relevant, Siegel said. For that reason, in this year’s report, GSAM didn’t publish respondents’ outlooks for interest rates or equities, though he noted respondents were modestly bullish toward equities and modest toward rising interest rates before COVID-19.

GSAM did include in the survey report responses from one-on-one discussions with six CIOs that occurred three or four weeks ago. From these conversations, GSAM found that movement into private assets and securitized assets is continuing, and movement out of cash, government securities and hedge funds also is continuing. “There has been some pause on investing in middle-market lending, real estate and mortgage loans, as these are impacted by the virus’ effect on the economy,” Siegel said. “All need cash to bridge themselves through this event; insurers are taking a wait and see attitude.”

CIOs described negligible long-term changes to their investment strategies as a result of the market volatility brought on by the pandemic. Most had already reduced their portfolio risks as a result of expensive valuations and anticipated credit cycle returns, GSAM found.

CIOs reported no changes in governance, but did say they had enhanced communication and collaboration. Siegel said they “sped things up.” There was more dialogue, with monthly meetings becoming weekly and weekly meetings transitioning to daily check-ins. This allowed insurers to be nimble and make quick decisions.

CIOs said they believe the movement from public to private investments will continue. Siegel said the benefit is picking up an illiquidity premium—they get a higher yield or expected return in exchange for liquidity. “Private investments are not subject to a run, not subject to withdrawals. They are very stable,” he said.

ESG

The GSAM survey found an increase in insurers using ESG as one of several considerations in investment selection—from 28% in 2017 to 70% in 2020. Similarly, those that reported ESG is not a consideration fell from 68% in 2017 to 21% in 2020. Nine percent of respondents indicated it is a primary consideration.

The primary motivation for ESG considerations is portfolio risk mitigation, cited by 27% of survey respondents. This was followed by board of directors/corporate directives (19%) and shareholder/creditor considerations and customer considerations (15% each). The majority of companies, however, said they had hurdles to implementing ESG strategies. Sixty-nine percent cited access to reliable standardized data. Siegel said companies need to be able to define and measure ESG metrics, adding that “it can’t just be a gut level feel.” He says there needs to be a creation of standardized data and an understanding of the data.

Interestingly, firms in the Americas were least likely to apply dedicated ESG investments in their portfolios compared to companies globally.

ETFs

ETF adoption by insurers continued to increase, with more than half (56%) of insurers in the Americas using them.

There is a greater use of equity ETFs than fixed income ETFs globally; however, in the Americas, 18% of respondents reported they use equity ETFs, 14% use fixed income ETFs and 24% use both.

GSAM said insurers that invest in fixed income ETFs most commonly use the allocations for short-term tactical measures and/or operational efficiency.

Compliance July 15, 2020

DOL’s Proposed ESG Restrictions Criticized by Senate Democrats

The Democratic senators join in a chorus of concerned stakeholders who say the DOL is being overly restrictive about the use of environmental, social and governance-themed investments.

Reported by

More than a dozen Democratic members of the U.S. Senate have filed and openly published a comment letter addressed to Department of Labor (DOL) Secretary Eugene Scalia, calling on the regulator to dial back its proposed rule seeking to restrict the use of environmental, social and governance (ESG)-themed investments within tax qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA).

The comment letter was published exactly halfway through the 30 day comment period allowed by the DOL, which ends on July 30. Any other interested parties may file their formal comments here.

Get more!  Sign up for PLANSPONSOR newsletters.

Senator Patty Murray, D-Washington, ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, penned the letter, alongside her colleague, Senator Tina Smith, D-Minnesota. Ten other Democratic senators signed the letter, including Ohio’s Sherrod Brown, New York’s Kirsten Gillibrand, Virginia’s Tim Kaine, Massachusetts’ Elizabeth Warren, Wisconsin’s Tammy Baldwin, Pennsylvania’s Bob Casey, Illinois’ Dick Durbin, Minnesota’s Amy Klobuchar, New Jersey’s Cory Booker and California’s Dianne Feinstein. Vermont’s Bernie Sanders, an independent, also signed the letter.

In the comment letter, the Democratic lawmakers say the rule as proposed will unduly discourage financial advisers from considering ESG criteria as they go about their business serving retirement plan investors. They urge the DOL to wholly withdraw its proposed rule, emphasizing how ESG investing can be important in considering practices that can impact a company’s performance. The letter points to factors such as greater diversity, and discusses how it can serve as a tool for long-term change in the fight against problems such as racial and economic inequality.

“We are at pivotal moment in the fight against systemic racism in our country,” the letter states. “Yet, while people across the country demand accountability and reach for available tools to fight for racial and economic equity—from advocating for sweeping federal reforms to address systemic racism to taking smaller personal steps like supporting Black-owned businesses—the [DOL] is moving in the opposite direction. … By restricting ESG investing, the [DOL’s] proposal would undermine a powerful tool that leverages trillions of dollars a year to drive positive social change.”

Simply put, the senators believe plan sponsors and fiduciaries “should be able to consider whether or not companies have established diverse leadership teams, whether they foster inclusive or discriminatory workplaces, and whether they engage in a variety of other practices that may impact a company’s performance.”

“ESG-based investing is a key way to grow a plan’s assets in a manner consistent with its corporate principles without sacrificing investment returns,” the letter states. “Racial justice, corporate diversity and other ESG factors are increasingly a consideration in investment decisions. Further, contrary to the skepticism and assumptions underlying the department’s proposed rule, ESG investments often outperform traditional investments and the overall financial markets, including over the past several years, showing investors can both achieve strong returns while driving positive change.”

In filing their comments, the Democratic senators join in a chorus of concerned stakeholders.

In a statement about the proposed rule shared shortly after its publication, Robert Smith, president and chief investment officer (CIO) of Sage Advisory Services in Austin, Texas, said, “The language is written in such a way that ESG-oriented funds are given second-class status when considering investment alternatives for a plan.” Smith pointed out that Millennial investors and defined contribution (DC) plan participants in general “would prefer a choice architecture that better reflects their investment attitudes and goals.” He concluded, “We are not sure this statement truly reflects those well-supported long-term demographic trends that will continue to affect the DC plan world in the future.”

Striking a similar tone, Lisa Woll, CEO of the U.S. Forum for Sustainable and Responsible Investment (US SIF) in Washington, D.C., shared the following statement: “The proposed rule suggests, but without evidence, that the growing emphasis on ESG investing may be prompting plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. However, the DOL proposal is out of step with professional investment managers, who increasingly analyze ESG factors precisely because of risk, return and fiduciary considerations.”

Woll noted that three-quarters of asset managers polled by US SIF in 2018 cited the desire to improve returns and to minimize risk over time as motivations for incorporating ESG criteria into their investment process. Fifty-eight percent of asset managers cited their fiduciary duty obligations as a motivation.

«