In­vest­ment

The SIA conducted its third survey of insurance companies operating in the Swiss market, seeking to gather information on sustainability in their investment activities. The survey enables a snapshot of the industry to be captured and changes over time to be charted.

There were some small changes to this year’s survey. For instance, the topic of ‘CO₂ emissions in the investment portfolio’ was added so that future reporting can be made more precise. The survey also included a comparison of key reporting figures as at end-2020 and end-2021.

As key players in the financial industry, private insurers can have a big impact on social and environmental sustainability by channelling capital into sustainable investments. As a result, a number of insurance companies started to manage their investments with sustainability criteria in mind and to restructure their portfolios accordingly some years ago.

In autumn 2018, the member companies of the SIA committed to taking ESG criteria into account when managing their own investments. ESG stands for ‘environmental, social and governance’ and refers to the consideration of sustainability risks and opportunities into decision-making.

‘The insurance industry manages a lot of capital, so by its very nature it bears considerable responsibility.’

Prof. Alexander BraunAssociate Professor of Insurance and Capital Markets,University of St Gallen

A total of 42 insurance companies responded to the survey, which revealed that over 90 per cent of them factor sustainability criteria and strategies into their investment decisions. Smaller insurance companies are increasingly reviewing their strategic positioning and approach to sustainable investing. The SIA supports the transfer of knowledge on particular topics among its member companies.

A majority of companies have implemented internal guidelines with stipulations on making sustainable investments, excluding certain investments, exercising voting rights and shareholder engagement¹. Exclusion policies were the most frequently used approach, with a further eight companies implementing them in 2021. The findings also showed a rise in the use of sustainable investment, voting rights and real estate policies.

The survey looked at which sustainable investment approaches were used (ESG integration, exclusions, best-in-class, voting, and impact and thematic investments) in the various asset classes. Exclusion plays a central role in the fixed income, equities and alternative investments asset classes. Under this approach, investments that do not meet certain standards and values are excluded from the investable universe.

Unlike the other criteria, the best-in-class approach is less firmly established among the insurance companies. This approach is used by a third of private insurers for both fixed income and equities – the same as in the previous year.

Impact investment and thematic investments, by contrast, are used at more than half of the companies for securities and alternative investments, with 15 companies using them in real estate investments. Exercising voting rights in line with ESG guidelines is a key approach for many companies (25 out of 39) when investing in equities. Results showed that these 25 insurers exercised their voting rights in respect of 47 per cent of their self-managed shares.

We asked private insurers whether they considered ESG criteria in their investment decisions during the year under review. Of the 42 companies that responded, 39 said that they did, which is seven more than the previous year. Based on these criteria, the companies analyse whether and to what extent an investment decision should be made. They also apply the ESG criteria in other steps within the investment process (e.g. in risk monitoring, portfolio management and divestment decisions).

Social responsibility is also a significant part of the ESG criteria used in the investment process. 36 of the 42 insurers surveyed have made this criterion a firm component of their policies, with an emphasis on human rights issues in particular. Other priority issues include employment rights, health, education and food security (in that order). Insurers that apply environmental and social criteria when making investment decisions also take governance criteria into account, focusing on leadership and diversity.

Of the 39 companies that apply ESG criteria, 37 have an environmental focus in their investment decisions, with key areas being climate change and (renewable) energy. Another focus is on investment to prevent environmental catastrophes and in water management. Some companies have also committed to achieving net-zero emissions by 2050.

Based on Finma figures for 2020² , the companies that responded manage 77 per cent of investments made by the private insurance industry. ESG criteria are included in the investment process for 80 per cent of this self-managed investment volume. The differences versus 2021 in the coverage and the degree of inclusion of ESG criteria are attributable in particular to the time lag between the companies’ data collection and that of Finma. As a result, the companies that participated in the previous year’s survey show a 6 per cent decrease in investments for the year under review compared with 2020. Another reason is that one insurer was unable to supply its real estate investment figures in time for this year’s report.

The explicit inclusion of ESG risks and opportunities is important for companies with regard to their investments in real estate, fixed income, equities and alternative investments. The asset classes with the biggest proportions of sustainable investments are fixed income and real estate, with 96 per cent and 83 per cent respectively classed as sustainable (as a share of total investments in that asset class). Other than in real estate, natural fluctuations are the main driver behind changes in the proportions of sustainable investments.

The companies aim to use impact investing as a means of exerting a positive and directly measurable impact on the environment and society. For half of the companies that make sustainable investments, impact investing plays an important role in the real estate, fixed income and alternative investments asset classes.

Through their investments in sustainable infrastructure and real estate, private insurers are seeking to play a part in transitioning energy supply and the building stock to an environmentally friendly and low-carbon future. Environmental considerations such as renewable energy and sustainability certifications (e.g. BREEAM Gold or ‘Green Buildings’ EPC) are also a key part of thematic investments in real estate and infrastructure.

Through their investments in sustainable infrastructure and real estate, private insurers are seeking to play a part in transitioning energy supply and the building stock to an environmentally friendly and low-carbon future.

In addition to environmental factors, social issues can also be easily addressed through real estate investments. The invested capital can be harnessed to incentivise the creation of community spaces, e.g. by applying a multi-generational model, creating communal areas, and including childcare facilities, local shops, green spaces and recreational areas.

Sustainability bonds were included under impact investing and thematic investments, as, depending on how they are structured, they have a social (social bonds), environmental (green bonds) or combined (sustainability bonds) focus. Sustainability bonds account for a large share of the investments made by many of the companies surveyed.

The regulatory requirements for investments made by insurers are very restrictive by international standards. This is true in particular for investments in infrastructure; for example, direct investments in facilities that produce renewable energy cannot be counted towards tied assets. This means that many insurers are restricted in the alternative investments they can make, although there is interest in longterm, sustainable investment.

Exclusion criteria are key to integrating sustainability into the investment process. If a predefined criterion is not met, either no investment is made or an existing investment is sold.

In all, 30 of the companies exclude investment in companies that generate revenue from thermal coal mining or that use a certain proportion of coal for power generation, meaning coal is a very widespread exclusion criterion for many insurers. 36 companies exclude investments in the manufacture of controversial weapons, making it the most commonly applied exclusion criterion.

More than 70 per cent of the companies surveyed included explicit information about their sustainability-related activities in their 2021 annual reports.

Larger insurers have published separate sustainability reports in recent years, with others planning to do so in the future. A number of insurers intend to expand their sustainability reporting activities.

Regulatory requirements and disclosure obligations will increase at both national and international level over the next few years. For instance, the Swiss Federal Council announced on 18 August 2021 that Swiss companies will be required to report in accordance with the TCFD standards from 2024. A consultation on this subject was opened at the end of March 2022.

At present, 12 of the 42 companies surveyed report in line with TCFD standards, while another 18 publish information about their sustainability activities but without implementing the TCFD recommendations in full. Beyond regulatory requirements, companies are often required to be more transparent about their sustainability by virtue of being members, supporters or signatories of industry bodies or initiatives such as the PRI. The corresponding reports are available on the PRI website.

Companies that operate internationally are subject to a growing number of sustainability regulatory requirements in other countries. This is particularly evident in the EU. Switzerland should make provision for any spillover effects, so an overview of EU regulations and their implications for Switzerland is set out below.

As part of its action plan on financing sustainable growth, the European Commission unveiled a raft of measures in 2018. These aim to redirect capital flows towards sustainable investments, mitigate the impact of climate change and social and environmental challenges on the financial system, and foster greater transparency and longtermism in the economy. Three EU regulations have since been enacted:

• Regulation on Disclosures Relating to Sustainable Investment and Sustainability Risks (SFDR)
   
• Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (Sustainability Taxonomy)
   
• Regulation on Low-Carbon Benchmarks and Positive Carbon Impact Benchmarks

A variety of regulations have also been amended, such as the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD). It is very challenging for market participants to implement these requirements as they are very closely linked and very extensive in their scope, while data availability is also limited.

The Taxonomy Regulation was published in the Official Journal of the European Union in June 2020. It establishes a classification system that defines the sustainability of products and services.

The current version of the Taxonomy Regulation uses a list of predefined criteria to determine whether economic activities are sustainable based solely on how they contribute to climate mitigation and climate adaptation. Social aspects and other environmental factors, such as pollution and biodiversity, will only be integrated into the regulation in the future. For now, it contains a requirement to ‘do no significant harm’ in these other areas.

From 2022 (in respect of 2021), insurers and other financial market participants that are based in the EU or that operate in EU countries are required to disclose the classification of their assets for the EU taxonomy (taxonomy eligibility). From 2024, financial companies will need to report what proportion of their portfolio is taxonomy-aligned. There are also plans to bring in new reporting standards under the EU Corporate Sustainability Reporting Directive (CSRD) from 1 January 2024.

Besides the issue of exclusively focusing on climate change, there are currently two other questions around the Taxonomy Regulation:

1. How can it be ensured that data is of adequate quality and scope?
   Some data providers on the market offer companies estimated values based on their revenue for their taxonomy eligibility. These are just estimated, however, as the companies only began publishing the underlying data this year. Since there are no reporting requirements at investment level, there is no distinct data for real estate or other asset classes either.
    
2. How is the scope defined for the required taxonomy-related information?
   The EU does give detailed information about the treatment of derivatives and government bonds, but some key guidance has not yet been passed

Some insurers have dealt with these two questions for the 2021 reporting year by publishing their initial figures in line with the minimum requirements of the Taxonomy Regulation.

Switzerland has not had an equivalent to the EU taxonomy until now. Finma published guidance on greenwashing in collective investments in November 2021, designed primarily to inform and protect investors in line with the EU Sustainable Finance Disclosure Regulation.

Integrating sustainable thinking throughout the entire investment process is key here, including the investment strategy, investment decisions, risk management, controlling and monitoring.

The guidance is aimed at all companies that manage or offer sustainability-related collective investment schemes. These companies must meet a raft of requirements concerning the organisation and governance of the asset manager, the fund documents and the point of sale. If they fail to do so, they are prohibited from giving customers the impression that their investment product is sustainable.

Integrating sustainable thinking throughout the entire investment process is key here, including the investment strategy, investment decisions, risk management, controlling and monitoring. For this to work, there needs to be the requisite expertise at every level, starting with the most senior management, which is responsible for drawing up the investment strategy, all the way through to the operational functions and sales.

The fund documentation should clearly detail how sustainability is integrated into the investment process. However, the SFDR cannot currently be referenced in Switzerland, which can be an obstacle for asset managers.

Swiss asset managers that also operate in the European market are hoping that Switzerland will adopt as many provisions as possible from the EU Taxonomy Regulation and the SFDR so that they can use a uniform system and standardised reports.

¹ Engagement refers to active dialogue between shareholders and management teams of investees or other relevant stakeholders. The focus is on the integration and application of environmental, social and governance criteria within their sphere of influence. It is also about owners being able to influence the companies in which they invest. Research shows that this strategy often achieves more than simply avoiding investment in certain industries. Source: ‘Sustainable Asset Management: Key Messages and Recommendations of SFAMA and SSF'

² The Finma figures for 2021 not yet published, so the 2020 data was used as the basis for comparison.

³ The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA)