@Zurich.
Danielle Brassel: Sustainable or responsible investments is a broad spectrum of investment approaches, and we focus on three in particular: ESG integration, impact investment, and advancing together.
When we established our three-pillar strategy ten years ago, the market was nowhere near where it is today. There wasn’t a lot of data, and tools and technology frameworks had to be locked in first, which meant that most of the underlying methodologies had to be agreed upon and this involved a lot of research.
"Our goal is to support and maintain good investments
while still getting a high return."
We describe our current approach to responsible investment as “doing good while doing well”. When we do ‘well’, we generate superior risk-adjusted returns for our customers and shareholders. When we do ‘good', we have a positive impact on society and the communities where we live and work. We do good by having a positive impact on society while helping the company, so we encounter, for example, fewer storms in the future. This outlook also protects the insurance business, which benefits us long-term.
We have an environmental and a social side, which we measure via broad targets. We mitigate environmental risk by focusing on targets that avoid CO2 emissions. On the social side, we look at how many people will benefit from our investments.
It’s important to consider the structure of your investment process. Our goal is to support and maintain good investments while still getting a high return. We are focused specifically on objective levels of environment/social with underlying targets, which aim to avoid five million tonnes of CO2 and support five million people annually.
Danielle: ‘Footprinting’ can be understood as the positive or negative influence your investments have on the wider world. Every investment, regardless of asset class, has an impact on communities, lives, and the environment. Companies or assets such as buildings and infrastructure are built and operated, and in the process, jobs are created or lost. Products are introduced, sold, and consumed; services are delivered; natural resources are harvested and processed; energy is produced and consumed; waste and emissions are created or mitigated.
"We need to know the metrics used to measure CO2 and the
people who benefit from its reduction."
This means that every investment has a footprint – positive and negative – that affects the real economy, our environment, and our communities. Increasingly, tools are available to measure such impacts. Examples are carbon emissions, or the share of ‘green’ and ‘brown’ revenues generated by portfolio companies.
To better understand how Zurich’s investments affect the environment, we strive to apply new data and tools, starting with measuring our carbon ‘footprint’. We’re moving in the direction of adding an ‘impact’ level to Internal Rate of Return (IRR) investment decisions. We need to know the metrics used to measure CO2 and the people who benefit from its reduction. These metrics should factor into investment and divestment decisions. Ideally, you wouldn’t divest from an asset with a high, positive impact.
Danielle: Most of our investment decisions are made by asset managers. We’re further away from the investment decision, but that shouldn't be an excuse. We still have a lot of power. We have developed an entire impact measurement framework for what we gather and collect data about the asset’s impact. We rely on third-party data.
This is because most of the information we have about companies comes from the companies themselves. This information is then given to the fund’s manager, who aggregates it. There’s no way I – someone who has invested in a fund manager – would know more about their investments than they would. We have to rely on companies themselves for relevant information about investment impact.
It’s also imperative that we understand how much exposure a company has to impact. I rarely finance anything myself: I have co-investors, and we need to understand our respective stakes. This is the pro-rata model, and it’s about making sure I’m only counting the impact that I finance with my share of the investment.
Danielle: Without measurement, we can’t manage positive impact – it’s that simple. Since this topic is important to us, we’re happy to do it. We’re hoping to inspire other investors to do the same and develop as we go.
For instance, by only gathering the CO2-avoided emissions and the number of people who benefit, we don’t capture all categories. If you invest in water sewage, you’re not financing CO2-avoidance, nor can you count the people who benefit from the investment. In the future, we could extend these metrics to make the framework broader and more applicable to various investment categories.
Danielle: I’d broaden the entire impact investing sphere. We have strategies within the fixed income space for green social sustainability bonds, within private equity, and a within private debt. When we have an infrastructure private equity portfolio set up, we look for ways to add to it, too.
"We want to professionalise impact reporting by working
with service data providers to make it more mainstream."
Look at current investment topics: the nature-based solutions of carbon credit add-ons, timber investments, and blended finance. We could seek out further exposure in emerging markets if a reasonable risk protection – one acceptable for an insurance company with limited exposure in emerging markets – were developed.
We could also improve data gathering and metrics. We want to professionalise impact reporting by working with service data providers to make it more mainstream – especially for smaller investors.
Danielle: As an investor, it’s important to be transparent about what data you are looking for and why.
My strategy is to be clear about what I want to do with the data. Using the aforementioned three-pillar strategy, I look for different sustainability data for ESG -integration than impact investment strategy data. For ESG integration, I look at potential risks the company is exposed to and trying to reduce, and then how they manage and mitigate that risk.
We learned from the impact investment side that it can be overwhelming to check all these data points. A good recommendation might be starting with small sets of data and then searching for specifics, like avoiding CO2 emissions and adding human benefit.
The next phase is impact management: managing the impact you have with your assets. Can I, for example, measure the impact even if I exit an investment? Does the impact stay with the company?
"We know we need more nature-based solutions and investments, and
we still need to understand how to further mitigate climate change."
As an investor, you know what data you are looking for. It’s important to ask the underlying assets or investee about that data because it sparks interesting discussions. For us – with CO2 avoided-emission – there is a straightforward greenhouse gas protocol definition. However, when it comes to who benefits and how much, there is no single definition and so therefore definition relies on other people’s and, sometimes, on definitions we produced ourselves.
Danielle: We’re committed to advancement, which means we need to make our data processes more professional. This will help us automate data providers, bring the industry together, exchange training and collaborate with our peers. We talk constantly about what we can do and how it can be streamlined.
We know we need more nature-based solutions and investments, and we still need to understand how to further mitigate climate change. We need to see responsible investment as an overall strategy because it isn’t visible when siloed.
