Navigating the complexity of insurance investment management while practicing responsible investment is only possible if responsible investment practices are fully integrated into the overall investment approach, and these practices are included in investment decision-making on an ongoing basis. Strategies and policies alone do not suffice. Responsible investment must become part of our DNA, and our culture; this will take time, leadership and ‘learning by doing.’

The following measures are helping us to accelerate and support this process:

• Responsible investment goals are included in individuals’ objectives throughout the Investment Management organization.  
• We have incorporated responsible investment in Zurich’s technical competency framework, which is used to determine job profiles and training requirements
• We have established a global group of ‘responsible investment champions’ representing individual teams
• We have built a small but dedicated responsible investment team directly accountable to the Group's Chief Investment Officer that acts as a catalyst and engages with the rest of the organization on an ongoing basis.

Examples of objectives and a description of responsible investment competencies can be found in the Zurich Whitepaper.

Investment Management has defined a clear and systematic approach to investing, which draws on findings and knowledge derived from industry and academic studies. Zurich derives great benefit from applying this approach globally to all investment activities. Not only does this approach provide consistency and discipline – it also helps to counter any tendency which otherwise could result in ‘pro-cyclical’ investment decisions resulting in additional investment risk being taken on in good times, and forcing assets to be sold at the worst possible times during periods of market stress. 

Insurance investment management is relatively complex, as is our balance sheet structure. Zurich holds investments in over 800 different portfolios, on over 200 different balance sheets in more than 40 jurisdictions, managed by over 40 different external, as well as internal asset managers. This complexity means that naturally in some cases exceptions are made; specific processes and approaches may not always be universally applied.

More information on Zurich’s overall investment approach can be found here.

Responsible investment means different things to different people. We have reviewed academic literature and thus far found no evidence to support the notion that ESG issues, such as climate change, are associated with a systematic market-risk factor and premium that could be reflected in the asset-liability-management (ALM) and strategic asset allocation (SAA) processes. Based on this, we believe that ESG issues are best reflected at the level of selection of individual securities or assets. This approach is different from ‘thematic’ allocations, for instance, to renewable energy or water funds, or ‘screening’ methods that exclude certain sectors or companies from the investment universe.

Since ESG factors have an impact on the risk and return associated with underlying assets, proactively including ESG in the security selection process should heighten asset managers’ awareness of the risks and opportunities associated with these factors. It should also encourage conscious choices around exposures to ESG-related issues and hence lead to a more holistic, better- informed view on risk-adjusted returns. While it is not our objective to systematically exclude companies or assets from the investment universe, we expect that, over time, ESG integration processes will lead the market to a more efficient pricing of environmental, social and governance factors. This will provide the right incentives to those seeking to raise capital in the market. 

While our approach is economic in nature, we do believe that ESG integration will eventually lead to positive environmental and social impacts.

At Zurich, Investment Management is responsible for managing the Group’s own assets, – investing the premiums received from writing insurance business. Zurich does not generally provide any asset management services to unaffiliated parties. In a few instances, in-house asset management teams manage specific funds that form part of insurance products offered directly to clients. While those investments are small relative to our own assets, the same responsible investment approach and processes apply to these funds. 

For the current implementation phase of our responsible investment approach, we consider the following asset classes as potential investments:

• Active non-‘quant’ equity strategies
• Active credit (financial credit; non-financial credit; municipal debt; direct lending)
• Passive equity and credit strategies, on a selective basis
• Private equity
• Real estate (direct investments)

Zurich also offers its customers so-called unit-linked products, where customers are responsible for choosing investment strategies from a range of externally-provided investment solutions. At this stage, Zurich’s responsible investment approach does not cover unit-linked assets.

Our asset managers are expected to reflect ESG issues in their investment approach. A dedicated manager selection team is responsible for appointing the most suitable manager for each portfolio. This outsourcing process provides Zurich access to the world’s best asset managers; currently our assets are managed by over 30 internal and external asset managers. 

Candidates are required to describe their approach to responsible investment, including their views on how ESG factors affect risk-adjusted performance. Once selected, we expect our asset managers to fully take into account the risks and opportunities associated with ESG factors when choosing assets for our portfolios, based on the requirements described above, and to frequently review their performance.

More information on our process for selecting and reviewing performance of internal and external asset managers can be found in the Zurich Whitepaper.

We believe that environmental, social and governance (ESG) risks and opportunities are best managed through an ESG integration approach. That being said, there are certain areas where we believe exclusion criteria are justified. Zurich does not engage in any business with, or directly invest in, a number of companies involved in the production of cluster munitions and anti-personnel landmines. To actively support the transition to a low-carbon economy, Zurich has applied an enhanced ESG risk screening criteria for investments in thermal coal, oil sands and oil shale companies. Read more

Find out more about how we work with our insurance customers to manage their ESG risks.

These are factors which impact on all the equity investment opportunities we look at. The E stands for environmental factors with which we are all familiar such as harmful emissions, the S for social factors to do with relationships with employees and suppliers for example and the G relates to the proper governance of the companies in our investment universe.

In the beginning, when Zurich started work on its responsible investment approach and became a signatory of the Principles for Responsible Investment, we were somewhat sceptical here in our team, thinking that there would be restrictions on our investment approach. In time, we came to realize that ESG is more of a sensible framework and set of tools with which to assess the potential risks attaching to our investment opportunities.

It’s been a gradual process, it’s been harder to do than to talk about it but it’s not magic. We have been provided with training and that helped. We have also taken great guidance from the analysis and views of MSCI, the company we appointed to be the provider of our ESG research. They have very wide coverage and a deep pool of analysts looking at these issues on a daily basis. 

In broad terms, it’s a lot of common sense and awareness. We need to think holistically about our investment choices. What are the risks attaching to an individual investment and how is that discounted in the stock price today. Are those risks inadequately reflected or perhaps there’s an opportunity we can exploit for our clients.

These are issues that we continually explore when we meet and talk with company representatives. We can also monitor the ESG ratings that MSCI attaches to our portfolio holdings and how the overall portfolios look on these ratings relative to the portfolio benchmark.

We have always done this for portfolio valuation and portfolio risk evaluation using measures such as price to earnings multiples, earnings growth rates and company debt ratios. Adding the more qualitative ESG risk factors to this analysis is another important input to our overall portfolio management approach.

For instance, we steered clear of a potential Chinese internet investment opportunity. We were concerned that we wouldn’t have the same shareholder rights as the founder members of the company and that those concerns were not adequately reflected in the company’s valuation.  Those fears proved well founded and various controversies have dogged the share price performance.

More recently, we have been spending more time evaluating the outlook for the emerging electric battery technologies in the auto sector. These issues have come to the fore even more since 2015 with concerns over vehicle emissions. As responsible investors, we need to think about the long term implications of these issues, what companies should benefit from emerging trends and technologies and those that stand to suffer from changing environmental regulations.

On the social side of ESG, we have had to think about the impact of Chinese clampdowns on corruption and its impact on Chinese gamblers in the former Portuguese colony of Macau. We substantially reduced our exposure to casino companies operating there because gambling revenues were taking a serious hit from these Chinese policies and restrictions.

Well, as part of the Zurich responsible investment approach, every country team had to appoint a responsible investment champion and I have the honour of that role here in Ireland. There are 20 of us or so around the globe. We have monthly calls with the responsible investment team.

The objective is to learn from each other, share best practices and help our teams to integrate ESG and promote an ethos of responsible investment generally in our investment processes. 

As an example of this, we were all collaborating a little while ago on a new group proxy voting policy. We want to influence the companies we invest in.  We see our votes on key management resolutions as a key way to engage with our investee companies and to be an active rather than passive owner of assets. This should help to promote sustainable investment and longer term investment returns to the benefit of all stakeholders.