Helping ESG move from the periphery to the mainstream

Original Content: AXA XL

The notion that investors should consider the broader societal implications of their investments isn’t new. In the 1960s, for instance, what was then called “socially responsible investing” ramped up in response to the Vietnamese war and apartheid in South Africa.

However, in 2005, investors’ focus started to broaden after the International Finance Corporation (IFC) “brought together institutional investors, asset managers, buy- and sell-side research analysts, global consultants and government bodies and regulators to examine the role of environmental, social and governance (ESG) value drivers in asset management and financial research”. This event—dubbed the “Who Cares Wins” conference—was the first time the now ubiquitous acronym “ESG” was used. Afterwards, the IFC noted, “There was a remarkable degree of agreement among the participants that ESG factors play an important role in the context of longer-term investment”.

From the periphery to the mainstream

Fast forward to today. Although what counts as ESG can sometimes be vague a standard description is that it applies to “companies that demonstrate good stewardship of the environment, maintain responsible relationships with customers, employees, suppliers, and communities, and exhibit conscientious leadership regarding executive pay, internal controls, and shareholder rights”.

In recent years, investments adhering to ESG principles have commanded significant market share. According to Bloomberg Intelligence, ESG-related investments have moved “from the periphery to the mainstream” as ESG assets totalled about USD 41 trillion in 2021. They now account for about one in three dollars managed globally. That is perhaps not surprising since companies that resist adopting ESG principles risk losing their competitive edge as regulators, investors, employees and consumers put more pressure on businesses to be socially and environmentally responsible.

AXA’s approach to ESG 

AXA is a significant player in the capital markets and, consistent with its corporate purpose—to "act for human progress by protecting what matters”—has incorporated ESG principles in its investment strategies.

Moreover, and more specifically, environmental, social and governance concerns have been one of the guiding principles of AXA XL’s political risk, credit and bond (PRCB) underwriting model long before ESG became a buzzword. In fact, our PRCB team have an extensive history of supporting investments and capital flows into emerging and frontier markets, including loans to micro-, small- and women-owned businesses and other underbanked sectors, as well as projects promoting food and health security, social inclusion and access to reliable and clean energy.

Unlocking greater financing

PRCB products, particularly credit risk insurance, can play a positive role in unlocking greater financing for ESG-related initiatives, including critical infrastructure projects and loans to underserved segments in emerging markets. By partnering with a credit insurance provider, like AXA XL, that assumes a portion of the risk, institutional investors and financial institutions can provide beneficiaries—i.e., private companies, governmental bodies or public-private partnerships—with funding that otherwise would have been unavailable or with financial packages larger than what the lenders could have delivered on their own.

For example, AXA XL and other credit risk insurers recently signed an agreement with the Asian Development Bank (ADB) to support lending to financial institutions in Asia and the Pacific. Under this program, AXA XL and the other insurers will cover the risk of non-payment on a portion of ADB’s loans to financial institutions, thus allowing ADB to transfer credit risk to insurers’ balance sheets. That, in turn, helps ADB manage its exposures while increasing its lending capacity.

Facilitating the transition to sustainability

In recent years, supporting the transition to sustainability has become an increasingly urgent priority, and AXA XL’s PRCB team has partnered with development banks, financial institutions and institutional investors on renewable energy, energy storage and smart energy solutions. We are also meaningfully participating on a project finance basis in infrastructure and developmental projects of up to 20 years for public infrastructure with positive ESG impacts, including low carbon transportation, water treatment plants, hospitals, schools, rural electrification and telecommunications networks, and clean energy development projects including wind, solar and hydropower plants.

Our PRCB teams across our global underwriting network are also supporting so-called “green” and “blue” loans. Green loans fund projects that substantially contribute to an environmental objective. Blue loans enhance efforts to grow and protect ocean resources and ecosystems vital to local economies. An example of the latter is the award-winning programme enabling Belize to restructure its sovereign debt and fund marine conservation projects; AXA XL is one of the insurers participating in this innovative initiative. The programme—the largest of its kind so far—combines development finance with political risk and credit insurance to help the Central American country reduce its debt burden while taking a quantum leap toward sustainable economic growth.

Making sustainability business as usual

As the pressures from regulators, lenders and shareholders to adopt ESG criteria continue to intensify, loan agreements with ESG elements and monitoring are becoming commonplace.

However, common standard(s) for assessing whether an investment will deliver positive environmental or social benefits currently don’t exist; companies have multiple ESG “frameworks” they can choose from.

Nonetheless, AXA XL is committed to ensuring that the risks we insure align with our ESG commitments. In this regard, we are working with key rating agencies to quantify ESG metrics within our risk ratings methodology to better capture the impact of ESG considerations on our portfolio. We are also having ongoing discussions with major development banks and other financial institutions on how credit insurance can be used in new, novel ways to achieve various ESG objectives.

In short, AXA XL is helping to create a financial ecosystem that normalises sustainability principles. Political risk and credit insurance play a vital role in this by helping unlock more financing to support the transition to sustainability, protect and grow local economies that rely on threatened natural resources, and promote lending to micro-, small- and women-owned businesses in emerging markets where the appetites of commercial lenders often are more constrained.

Victoria Soo is an Underwriter with AXA XL’s Political Risk, Credit & Bond team. She is based in Singapore and can be reached at victoria.soo@axaxl.com

Daryl Soh is a Senior Risk Analyst with AXA XL’s Political Risk, Credit & Bond team. He is also based in Singapore and can be reached at daryl.soh@axaxl.com

Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

US- and Canada-Issued Insurance Policies

In the US, the AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of AXA XL.
US domiciled insurance policies can be written by the following AXA XL surplus lines insurers: XL Catlin Insurance Company UK Limited, Syndicates managed by Catlin Underwriting Agencies Limited and Indian Harbor Insurance Company. Enquires from US residents should be directed to a local insurance agent or broker permitted to write business in the relevant state.