On the go: UK life insurers could allocate up to £170bn to illiquid investments over the next decade, with a substantial portion focusing on new sustainable assets, according to Fitch Ratings.
In an analysis note published on December 22, the ratings agency stated that this drive into sustainable assets will grow “due to a strong demand from corporates seeking to offload the risks related to legacy pension schemes”.
Fitch’s assessment is based on Hymans Robertson’s estimate of the UK pension derisking market, expected to be between £370bn and £630bn over the next 10 years, alongside annuity writers’ current allocation of roughly 27 per cent to direct investments.
The ratings agency stated that life insurers, and annuity writers in particular, are “accustomed to sourcing fixed income assets with reliable long-term cash flows in order to match long-duration liabilities”.
“We believe that this fairly early adoption of sustainability considerations will mitigate future financial risks from climate change,” the document read.
Fitch also noted that the general regulatory mood and public sentiment is supportive of the creation or sourcing of sustainable assets, with the Prudential Regulatory Authority stating in 2019 that companies are expected to “understand the financial risks from climate change and how they will affect their business model”.
Several initiatives in this area have been announced recently, such as Legal & General pledging to cut the carbon emissions intensity of its £80.7bn annuity book by 18.5 per cent by 2025, and 50 per cent by 2030, as part of its drive to become net-zero by 2050.
According to Fitch, many insurers have already started investing in sustainable projects, predominantly in low-carbon infrastructure, including solar and wind power and electric vehicle charge point operators.
