How blended finance is helping insurers navigate emerging markets | asset owners

As long-term asset owners, insurers, by the very nature of their investments, must be aligned with the concept of sustainability to stand the test of time, says Rodney Gollo, chief risk officer at Bupa Asia Limited.

And he believes there are plenty of opportunities for these investors in Asia. However, many emerging markets in Asia and around the world are often considered high risk for institutions. Factors such as currency risk or political risks can make many of the investments in these regions not particularly attractive to these long-term investors, Gollo said. Asian investor.

“One area where I think insurance companies could play a role, particularly when it comes to accelerating and mobilizing, not even climate finance, but just general finance for emerging frontier markets, is this concept of blended finance.” , said.

Rodney Gollo,
Bupa Asia Limited

Blended finance is an approach to structuring investments to facilitate the attraction of capital from the private sector, predominantly in developing countries, using public or philanthropic sources of capital to improve the risk/return profile and mobilize private sector financing from institutional investors.

This is usually done through a multilateral development bank, international financial institutions or public-side foundations and donations, Gollo said.

“In that sense, blended finance can provide an easier route for the private sector to invest in companies, projects or initiatives that help the sustainable development goals (SDGs). Traditionally blended financing solutions, including loss guarantees, grants or technical assistance, have tended to be better suited to SDGs that generate business returns. For example, Goal 8; decent work and economic growth, and Goal 9: industrial innovation and infrastructure,” he said.

Other goals, such as Goal 3: Good health and well-being, and Goal 6: Clean water and sanitation, have so far focused less on the use of blended finance solutions, in part because they have tended to be primarily government funded. he explained.

“However, with Covid and inflationary pressures leaving many economies fiscally vulnerable and constrained, blended finance solutions could help fill this gap,” Gollo said. “Since blended financial structures typically come with loss guarantees or other forms of insurance protection, insurers can help facilitate such investments.”

ASIA’S ESG ECOSYSTEM

While environmental, social and governance (ESG) is a broad term and can mean different things to different people, Gollo classifies the ESG ecosystem as reflecting four interdependent dynamics: what regulators are doing; what are companies doing; consumer behavior; and ESG investing.

“Each of these dynamics builds on the other to develop and maintain a favorable long-term environment that addresses ESG issues as a whole,” he said.

In terms of regulation, Gollo said the ecosystem is starting to grow in relation to climate risk and a number of regulators are rallying around the Task Force on Climate-Related Disclosures (TCFD) as a standard bearer.

“I think regulators’ mandates will need to be increasingly expanded on social issues and how these relate to climate risk issues, especially as countries emerge from Covid and may have seen certain social and economic benefits eroded.

“As climate risk is a highly interdependent risk factor, regulators will also need to be more innovative in their thinking to help evolve companies’ thinking about climate risk,” he said.

“This, in turn, is likely to further help governments to consider these factors in different ways and thus align policymaking in a consistent way with dealing with ESG issues,” added Gollo.

He said that companies are having to look at their business models through a slightly broader lens, especially as it relates to small and medium-sized enterprises (SMEs) and micro and small and medium-sized enterprises (MSMEs) that by volume make up the majority of companies in Asia, he said.

“Here I feel that the ecosystem is less developed, but progress is being made; it requires ongoing engagement across an organization’s value chain and at the board level.”

In terms of consumer behavior and citizen awareness of the issues ESG addresses, Gollo believes that, particularly from a climate perspective, the Asian region has historically been exposed to acute natural hazards in recent years, such as floods, typhoons, cyclones, droughts and heat waves.

“In that sense, I think that the level of awareness and exposure of citizens to environmental and social problems is high in Asia. However, if this has translated into an established consensus among consumers, I think there is still room for growth,” Gollo said.

ESG investing is where Gollo feels the ecosystem has seen, and continues to see, the most growth and diversification.

“Sustainable finance, for example, and the role that financial and non-financial services companies play through the issuance of ESG-labeled bonds is growing in the region, and many of the large asset owners in the region are embracing more ESG investing and integration. seriously,” she said, adding that fund managers are also integrating ESG into their stock selection.

CHALLENGES AND STRANDED ASSETS

Coupled with the growth of ESG investment products, the perennial risk associated with greenwashing, or ESG funds in name only, has the potential to limit the credibility of ESG more broadly.

“However, even in developed markets like the EU and the US, we have seen companies and funds face increased scrutiny over their ESG credentials. Asia is no different, and it is something that needs to be closely managed,” Gollo said.

For investors in the region transitioning to more sustainable and ESG-focused investments, certain common challenges remain, including the availability of reliable data, transparency, and product comparability.

“This naturally ties in with the issues of setting decarbonization targets, deciding strategies based on portfolio composition, while seeking to ensure that financial performance is not compromised,” Gollo said.

However, a more practical challenge facing insurers is transition risk, specifically managing the risk of stranded assets, he said.

“This is an area where I think regulators could help companies in the future. Given that Asia has some of the highest emitting countries in the world, I think regulators could help insurers by having frameworks and guidance to better understand, assess and manage stranded asset risk.

“This would help insurers better identify business and corporate models for which transition costs could be high and where to focus their engagement activities,” Gollo said.

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