CTF Life adopts 'double-materiality' climate approach
CTF Life (formerly FTLife) has adopted a sophisticated "double-materiality" framework for sustainable finance that simultaneously addresses environmental impact and investment risk, setting a new benchmark for climate risk integration among Asian insurers, according to its chief investment officer and ALM officer, Richard Chan.
The Hong Kong-based insurer recently became the first in the region to implement Bloomberg's MARS Climate solution, a move that reportedly significantly advancement in how insurance companies are approaching climate-related portfolio risks.
"CTF Life approaches sustainable finance under an impact and financial double-materiality framework," Chan told AsianInvestor.
"On top of contributing to the development of a sustainable community, we proactively manage our investment portfolio factoring in climate risk considerations, which help improve the long-term risk-adjusted return of our policyholders, creating value beyond insurance."
TARGETED RISK ASSESSMENT
For CTF Life, which manages a portfolio where bonds and equities represent more than 90% of investments, the ability to differentiate between sector-specific climate risks has become increasingly critical.
"The exact type of climate risk that is material differs sector-by-sector," Chan said.
CTF Life
"For example, the investment into property sector that has a significant amount of real assets in their balance sheet can be subject to higher physical risks, while the investment into companies from the high emitting sectors like power generation can be subject to higher transition risks."
This nuanced understanding has led the insurer to adopt tools that systematically measure climate risk exposure at a granular level.
"It is important to have a tool that systematically and consistently measure the risk of our bonds and equity investment, from a first principle based on the actual business and financial [data] of those companies, and reflecting the nature (bond vs equity) of the investment," Chan said.
The MARS Climate solution allows CTF Life to leverage Bloomberg's comprehensive financial datasets to evaluate climate impact on the enterprise value of portfolio companies under different scenarios published by the Network for Greening the Financial System (NGFS), he added.
ESG INTEGRATION
Chan revealed that the insurer's approach extends beyond mere regulatory compliance, fitting into a broader ESG strategy covering both operations and investments.
"CTF Life's broader ESG strategy consists of multiple dimensions, across environment, social and governance, and covers both our own operations and our investment portfolio," he said.
"Within our investment portfolio, we have a formal Responsible Investment Standard that covers different implementation pillar like exclusion, inclusion, fundamental research, quantitative portfolio ESG targets, engagement and disclosure."
The integration of climate risk analytics supports several aspects of this framework, particularly enhancing fundamental research capabilities and potentially informing the establishment of portfolio risk appetite metrics for climate scenarios.
"As we get more understanding of this topic, we may also want to set our portfolio quantitative risk appetite of the acceptable loss upon different scenarios," Chan said.
The approach aligns with Hong Kong's evolving regulatory landscape, particularly regarding standards set by the International Sustainability Standards Board, which are expected to become mandatory requirements for listed companies and major financial institutions.
"It helps support the ESG disclosure -- by linking the material ESG issues with the quantifiable financial impact to our company," Chan said.
For CTF Life, this addresses financial materiality alongside impact materiality, the latter being covered by the insurer's separate initiative on Science-Based Targets initiative (SBTi) target setting and transition, he added.
CLIMATE ANALYTICS
While enhanced reporting capabilities represent an immediate benefit, CTF Life views advanced climate risk analytics as fundamental to its core business proposition.
"We believe insurance is a risk management business. Our protection products help policyholders manage their life and health risks, while our savings and wealth management products help policyholders accumulate wealth at manageable uncertainty," Chan said.
The implementation of MARS Climate builds upon CTF Life's 2021 adoption of Bloomberg's suite of buy-side solutions, including the order and investment management technology solution Bloomberg AIM and the advanced portfolio and risk analytics solution PORT Enterprise.
For policyholders, the benefits translate to increased confidence in the long-term resilience of the insurer's investment strategy.
"By integrating the more sophisticated climate risk analytics into our investment process, we can improve the long-term resilience of our investment portfolio, and hence the long-term resilience of our solvency position and the non-guaranteed returns to the policyholders," Chan said.
"This approach emphasises our commitment to maintaining a resilient financial portfolio for our customers, even amidst volatile market conditions. We see this as important as our vigorous asset-liability management process that ensures resilience upon short-term market volatilities."
The insurer's adoption of climate analytics tools comes as global investors increasingly focus on climate risk disclosure and management, particularly in the insurance sector where both assets and liabilities can be affected by climate-related events.