ESG Principles and Alternative Assets

Reports show that environmental, social and governance (ESG) principles are gaining prominence in insurers’ investment decisions, especially for alternative assets. Institutional and retail investors are seeing an increased demand for portfolios that align with ESG values. For insurers, integrating ESG principles into alternative asset strategies can help attract capital from investors who prioritize sustainability. ESG principles are important when managing alternative assets because they help insurers mitigate risks, improve long-term returns, enhance diversification and align with broader societal trends toward sustainability.

What Are Alternative Assets?

Examples of alternative assets include private equity, commercial real estate, emerging markets, energy transition infrastructure and collateralized loan obligations. The Society of Actuaries (SOA) Product Development Section has deemed alternative assets a research focus for 2025 and recently sought researchers to summarize their emerging scope and uses.

While life insurers historically have invested in portfolios in the relative safety of traditional stocks, bonds and cash, they have steadily increased their asset allocation to alternative assets over the past decade. As reports have shown, more than half of insurers globally have had exposure to alternative assets and seek to diversify investment holdings to reduce portfolio volatility, hedge against inflation and achieve high-risk-adjustable returns.

How Do ESG Principles Shape the Investment of Alternative Assets?

I believe insurers that integrate ESG principles into their alternative asset management strategies are better positioned for sustainable success.

E: Environmental Impact

Alternative investments, like real estate or infrastructure projects, are scrutinized for their carbon footprint and resilience to climate risks. As articles have outlined, insurers are sensitive to the environmental impact and risks posed by climate change, such as extreme weather events or resource depletion, and could be more likely to invest in projects and assets that support clean energy, low-carbon technologies or projects with sustainable environmental practices.

Investments in green infrastructure, such as renewable energy projects and energy-efficient buildings, are recognized for their alignment with long-term sustainability trends and offer the potential for stable returns in a carbon-conscious world.

S: Social Considerations

As articles suggest, insurers are increasingly considering the social impact of their investments. When investing in private equity or real estate, projects that create jobs, promote social inclusion or improve local communities are favored by insurers. This could include funding affordable housing, health care facilities or renewable energy projects in underserved regions.

Insurers, as articles note, also analyze the labor practices of the companies they invest in and assess how well a company treats its employees, whether it supports diversity and inclusion, and how it addresses supply-chain risks related to human rights violations.

G: Governance Factors

Insurers are focused on the governance practices of the companies or assets they invest in. For alternative assets like private equity or hedge funds, insurers may prefer investments in companies with strong management teams, transparent financial practices and well-structured boards.

Strong governance can mitigate risks related to fraud, mismanagement or regulatory violations, which is crucial for long-term profitability and stability.

The Future of ESG Principles and Alternative Assets

ESG principles help insurers assess risks and opportunities associated with investments in alternative assets, which often involve more complex and longer-term projects. To manage alternative assets under ESG principles, insurers must integrate ESG factors into the investment process, from screening and due diligence to monitoring and reporting.

Integrating ESG factors may improve risk-adjusted returns by identifying investments that are less likely to experience large-scale disruptions or volatility. For example, companies with strong governance practices and positive social or environmental impact may be better managed and more efficient, leading to more consistent financial performance. In my opinion, ESG-conscious investing often helps insurers avoid costly surprises, such as legal liabilities, reputational damage or environmental remediation costs.

In my experience, insurers are more confident than ever that sustainable and responsible investments can generate competitive risk-adjusted returns. By incorporating ESG factors, insurers can identify new areas of growth that align with broader societal trends, such as investments in renewable energy, clean technology or sustainable agriculture. ESG-driven asset management helps to enhance financial performance, mitigate reputational risk and support sustainable development, benefiting both the insurer and the broader community.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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