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SwissRe's $130bn benchmark change ‘most meaningful’ step in ESG shift

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SwissRe is implementing environmental, social, and governance (ESG) benchmarks across its entire $130bn investment portfolio, with the switching process due to be completed in the third quarter of this year. 

Last year SwissRe moved to adopt ESG-based benchmarks for its actively managed credit and equity portfolios. A spokeswoman for the company said it was around 90% through the shift for the whole portfolio.

Guido Fürer, group chief investment officer at Swiss Re, said adopting broad-based ESG benchmarks “has been the most meaningful and strategic step in our journey to integrate ESG considerations into the investment process”.

“These benchmarks represent a suitable tool to achieve the desired investment behaviour and set the right measurement both from a performance and ESG perspective,” he added.

The indices it selected were based on MSCI’s ESG methodology. It is using the MSCI ESG index family for equities and the Bloomberg Barclays MSCI Corporate Sustainability index family for fixed income. 

SwissRe carried out analysis that it said demonstrated corporate bond portfolios constructed from companies with higher ESG ratings showed a better risk-adjusted return.

The same applied to equities, but not in all local markets to the same extent, the reinsurer added.

It acknowledged that a shift to ESG benchmarks would entail a smaller investment universe, but said that over the long-term such moves would motivate excluded companies to further incorporate ESG considerations in their business approach and expand and improve disclosure.

“ESG factors will have an impact on company valuation and cost of capital, and as such become an integral part of financial analysis,” it said. 

For actively managed portfolios, portfolio managers are allowed to invest a small percentage in off-benchmark investments with additional ESG rating restrictions based on their own ESG assessment, SwissRe said.

SwissRe’s announcement comes after Japan’s Government Investment Pension Fund earlier this week announced it will track three ESG indices for around ¥1trn (€7.8bn) of Japanese equity investments.

Impediments to wider ESG take-up 

SwissRe said it was convinced that taking ESG criteria into account made economic sense and reduced downside risks – especially for long-term investors.

However, ESG integration was not yet part of the standard investment approach, the reinsurer said. One key reason for this was a lack of industry standards for responsible investing. SwissRe cited a survey from the Chartered Alternative Investment Analyst Association in which 84% of 647 respondents took this view.

“Having a more standardised responsible investing market environment with a generally agreed set of best practices provides clear guidance to investors and reduces investment barriers,” said SwissRe. “Enabling a systematic and consistent integration of ESG considerations requires clear definitions, standards and methodologies.”

Short-termism in company investment analysis was another hurdle to wider adoption of ESG integration, as ESG factors materialise over a longer-term horizon, noted SwissRe.

In an update on its initiative about ESG and credit risk analysis earlier this week, the Principles for Responsible Investment said the time horizon over which ESG factors are deemed material was one of the points where there was the most disconnect between credit rating agencies and investors.

SwissRe also said there was a lack of suitable ESG-related investment products, with traditional benchmarks, especially for fixed income, not including ESG approaches in their security selection.

Benchmarks that did consider ESG factors were often skewed toward a specific theme, such as carbon footprint reduction, it added.

Overall, according to SwissRe, “much of the available information and recommendations related to ESG investing remain on a rather theoretical level and are not sufficiently concrete for long-term institutional investors”.

“Well-defined and more detailed guidance is needed to help the investor base become comfortable with ESG integration and to support an industry shift towards longer-term and more sustainable investing,” it said. “From a macro-prudential perspective, standard setters have to adjust quickly and provide an appropriate framework around the disclosure and regulation of responsible investing.”

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