Investing Sustainably in the Financial Sector

I love clients who push me towards new ideas in sustainable investment. Currently, I’m working with a lovely couple in Toronto who hold the honour of being my ‘deepest’ green clients so far. They are adamant that not a single dollar be invested in fossil fuels, and won’t tolerate any banks who themselves hold investments in coal, oil, and natural gas. I can’t, in good conscience, let them lose out on the strong financial returns and diversification benefits that come with exposure to the financial sector. So I got creative within these constraints, and here’s what I’ve come up with:

First, I checked the most progressive banks in Scandinavia like SEB and Nordea. Unfortunately, they have heavy holdings in the Norwegian oil fields (among other fossil fuel investments). SEB has a great set of environmental polices, but it accepts that fossil fuels will remain a strong part of our energy mix moving forward and has invested accordingly.  

Next, I checked the Newsweek Green 500 list to see what other financial companies were on top. Brazil’s Itau Unibanco Holding and Australia’s Westpac Banking scored well, but both have significant exposure to the traditional energy sector and sell mutual funds with the same. I was feeling a little glum, when a lightbulb went off in my head. Insurance!! Although insurance companies might provide insurance to the energy and mining sectors, they don’t actually own any of the assets. This would be a great way to get exposure to the financial sector, without owning (directly or indirectly) a single stake in a fossil fuel project!

For indexers, there are three Insurance ETFs, but they all are limited to US companies:

PowerShares KBW Insurance Portfolio (KBWI)

iShares U.S. Insurance ETF (IAK)

SPDR S&P Insurance ETF (KIE)

However, I’ve long been impressed with the sustainability efforts coming from European re-insurance companies like Munich Re and Swiss Re, who are in the business of selling insurance to insurers (hence the notion of re-insurance). When you buy car insurance, you’re hedging your bets against a bad situation like getting your car totalled. You’re trading a little stream of money every year for protection against the big financial shock of replacing your car after a bad accident. In the same way, insurance companies themselves need to hedge against catastrophic events like major storms that cause billions of dollars worth of damage. They buy re-insurance to protect against ‘Acts of God’ that could put smaller insurance companies out of business.

This puts investors in a funny position. A company like Munich Re (MUV2) is on the hook for major catastrophes like the Fukushima disaster. At first blush this seems like a bad idea for people who acknowledge that climate change is getting worse and expect bigger and more frequent storms. On closer inspection, I like it because it directly aligns incentives with people concerned about climate change. Re-insurers have the largest vested interest in averting the worst case climate scenarios that will cause chaos. They have a financial incentive to sound the risk alarm, and are now taking on lots of projects to mitigate and adapt to the stark reality of our rapidly changing climate. Munich Re has taken a leadership role in the Desertec project, which I still feel is one of the sexiest green energy projects on the planet

In addition to managing climate and disaster risk, Swiss Re (SREN) is doing some really cool work in the field of microinsurance. They’re providing protection against disasters (including drought and floods) that will impact low income and risk exposed societies around the world, with a particular focus on West Africa. Millions of families, farmers, and small business owners need access to insurance in order to feel comfortable starting big projects. As well, it helps to build economic resilience in communities that would otherwise have a hard time bouncing back from an environmental shock. Microinsurance currently represents a tiny fraction of Swiss Re’s revenues, but I can see it scaling up quickly to massive proportions. If they can successfully provide insurance to the bottom of the pyramid, it will drastically improve their bottom line while facilitating tremendous economic development where it is needed most.

These re-insurance companies are great for investors who want exposure to financial companies without taking on any carbon risk. Oh, and did I mention that Munich Re and Swiss Re currently pay annual dividend yields of 4.5% and 4.86% respectively?

I’m very curious to hear people’s thoughts, so please leave a comment below!

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Showing 4 reactions


commented 2014-08-26 11:42:33 -0400
Hi there, I stumbled across your blog and love these discussions….I will now come see you speak at CSI on the 4th! Having grown up with family in the reinsurance industry I was very interested in what you’ve written about that. And I love that you find green energy projects sexy :) Keep up the great work
commented 2014-06-27 13:59:46 -0400
So, an insurance-based ETF (US) highly correlated but outperformed a general finance sector ETF (US) in the last 5 years … during which the insurers faced lots of extreme weather events and the banks got bailouts? Hummm …
commented 2014-06-27 13:34:10 -0400
Thanks Derek! I just ran a quick 5-yr chart between KIE and XLF (a financial sector ETF that includes insurance among banks, etc). It looks highly correlated, although the insurance sector has outperformed: http://imgur.com/x89l3Nz
commented 2014-06-27 13:00:25 -0400
Very interesting take, Tim. Informative article. Curious if insurance-based indices/ETFs mirror the performance of financial sector-based indices or banking sector-based indices.
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