Bulk annuity insurers have continued to "up their game" on responsible investment practices and climate risk management, according to LCP’s third responsible investment review.

The biennial review rates insurers on their environmental, social and governance (ESG) credentials, to help trustees and sponsors of defined benefit (DB) schemes to incorporate ESG factors into their decisions regarding buy-ins and buyouts.

The review found that, of the nine insurers who participated, 100 per cent have set out formal net zero targets for their investments with the typical target year being 2050, up from 7 out of 8 active insurers from the last review.

These commitments are also developing beyond a headline target, as LCP found that insurers are investing in climate solutions like renewable energy, engaging with high emitters, and applying interim targets, with a 50 per cent reduction in emissions by 2030 being the most common.

Out of the nine insurers, seven have also committed to the UK stewardship code as asset owners, an increase from two out of eight insurers in the previous review.

Despite these improvements, LCP emphasised that this is a “fast-evolving area”, warning that insurers that do not “keep up the pace” of developments will see their scores decline.

Given this, LCP called for insurers to set explicit targets around forward-looking measures, and to extend interim targets to cover 100 per cent of the assets backing their annuity book, where this hasn’t been done already.

It also urged bulk annuity insurers to address systemic risks like climate change by using investors’ influence to change policy, regulation, and industry practice, as the review only found limited examples of this 'systemic stewardship'.

Commenting, LCP partner, Tom Farrell, said: “I am encouraged by the progress made by insurers when it comes to responsible investment practices within their bulk annuity arms.

“There have been tangible improvements in areas where we engaged directly with insurers in our previous reviews, such as establishing robust net zero targets and signing up for the UK Stewardship Code.

“However, it is important to recognise that there is still a long journey ahead to effectively manage systemic ESG risks such as climate change.

“The insurers (and other investors) need to collaborate and continue to evolve and expand their efforts to stay ahead of these challenges to ensure effective management of these risks and the long-term security of members’ benefits.”

The nine active bulk annuity insurers that took part in this review were Aviva, Canada Life, Just, Legal and General, M&G, Pension Insurance Corporation, Rothesay, Scottish Widows and Standard Life.

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