Twelve Capital finds Impact Scores matter, top-rated companies outperform

Twelve Capital, the insurance, reinsurance, catastrophe bond and insurance-linked securities (ILS) focused investment manager, has highlighted the importance of impact grading and ESG scoring, while finding in a study that the top-rated companies tend to outperform those that score more poorly.

Twelve Capital is one of the group of Switzerland-based insurance-linked securities (ILS) investment fund managers that have collaborated on data transparency proposals to help enhance environmental, social and governance (ESG) disclosure in the ILS market, and the manager also applies its own Impact Scores on companies it looks to invest in or allocate capital to their securities and other instruments.

The company believes that there is “no path to net zero without addressing the funding gap”, saying that “currently less than half of climate finance flows are funded by the private sector.”

“The conundrum is assessing how effectively and efficiently capital is in reality being committed to address the current budget deficit. This is what Twelve’s impact scores measure,” Twelve Capital explained.

In applying its Impact Scores, Twelve Capital said that it has rated 224 companies, making up the majority of the MSCI Financials.

Looking at these scores, the investment manager has found that, “beyond doing the right thing, best-in-class companies are citing improved branding, positive externalities, an improvement in their cost of capital (equity risk premium), better distribution/operating costs and enhanced capital efficiency.”

As a result, “Financial benefits are starting to materialise and impact scores deemed best-in-class rated companies are outperforming companies Twelve have deemed as worst-in-class,” the investment manager said.

Daniel King-Robinson, Head of Sustainable & Climate Investing at Twelve Capital explained, “The results of our 2nd Thought Leadership are compelling, especially given we have now broadened our scope of engagement and impact rankings towards the entire MSCI Financials.”

Urs Ramseier, Executive Chairman of Twelve Capital, added, “What this Thought Leadership clearly shows is capital reallocation towards net zero has significantly progressed, the pace of change needs to pick up and very importantly causality is starting to stack up into performance.”

Looking into the data, Twelve Capital found that among insurance and reinsurance companies, the results are a bit mixed.

While in 2022, 62% of all companies scored had in place some kind of a climate-orientated investment intention, vs 57% in 2021, property and casualty insurers actually declined last year, while multiline insurers improved their intentions.

On the intentions of insurance and reinsurance companies to either reallocate their underwriting book away from greenhouse gas intensive areas towards low-carbon risks, as well as divestment intentions, Twelve Capital found that between 40-50% of companies within Reinsurance, P&C and Multiline insurance are either actively walking away, or have an intention to do so.

However, Twelve Capital also found that, “Despite this only between 10%-20% of companies across all three subsectors are actively engaging with their clients.”

As some ILS managers increasingly push to gain greater climate and ESG related disclosure from cedents and sponsors of instruments such as catastrophe bonds, it will be interesting to see how intentions and activity adjusts over the coming years, especially when traditional reinsurers are also beginning to score their ceding clients more regularly.

Still, more work needs to be done, Twelve Capital’s study found, with some 29% of companies graded lacking any tangible emission targets or specific timelines for adopting them, or reducing their emissions.

One place where the reinsurance industry scored particularly well though, is in short-term operational net zero targets.

“Only 18% of all companies graded had a short-term operational net zero 2030 target. Again, this was broad based across all subsectors except for Reinsurance where 50% of companies adopted such a target,” Twelve Capital noted.