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Responsible investments The next steps in our journey

Investing responsibly makes economic sense.

However, as long as ESG criteria are not yet an integral part of all financial analyses, investors need to make an effort and actively integrate ESG considerations in their investment decisions.

We are encouraged by the experience we have gained with integrating ESG and will further progress on our journey.

We’re smarter together.

Foreword 3

Introduction 4

Swiss Reʼs approach to responsible investing 5

ESG across all asset classes 7

Deep dive: Corporate credit investments 10 ESG benchmarks 10ESG ratings 10 Current index characteristics 11 Risk and return profile 12 Our experience 14

Our wish-list: accelerating the adoption of ESG 18

Conclusion 20

Contents

Swiss Re Responsible investments – The next steps in our journey 1

What ESG meansfor Swiss Re

For Swiss Re, “responsible investing” is an investment approach that integrates environmental, social and governance (ESG) criteria via a controlled and structured investment process to generate long-term and sustainable financial performance. Throughout this document, the terms ESG and responsible investing are used synonymously.

It is Swiss Re’s vision to make the world more resilient. We do this not only by helping to close the protection gap, but also through the investments we make. And investing responsibly does make a difference. In 2017, we announced the integration of environmental, social and governance (ESG) criteria into our investment management process, building on our long time experience in responsible investing. A key step in our journey was the switch to ESG benchmarks for our actively managed listed equity and credit portfolios. We made these changes to improve risk-adjusted returns over the long-term and to pioneer the use of ESG benchmarks. Since our announcement, we have made further progress and now apply ESG criteria to close to 100% of our investment portfolio.

Since the start of our journey we have consistently shared our experience with investors and other interested parties. Our previous report, titled “Responsible investments – Shaping the future of investing”, illustrated our thinking and approach. It also called for the private and the public sectors to work together to further harmonise definitions and methodologies in the ESG space.

We believe sharing our knowledge and experience around ESG contributes to solving some of the impediments which still exist. We are using many opportunities at public events and in discussions with national and supranational institutions to share our experience and promote the development of a common understanding of the topic. These activities hopefully aid in minimising regulatory barriers and to further advance the impact of responsible investing and long-term financing.

Now, almost a year later, it is time to report back, confirming our initial findings and reaffirming our commitment to responsible investing. We continue to call for a joint effort to overcome the hurdles that are still keeping many away from investing in a sustainable way.

Guido Fürer Group Chief Investment Officer

Foreword


Given our conviction that investing responsibly makes economic sense, we have systematically applied ESG considerations across the asset classes we invest in, following our three-pillar approach of Enhancement, Inclusion and Exclusion.

ESG integration is gaining momentum not only in the financial industry but in the entire economy. Many companies are increasing the level of disclosure on their responsible investing approach. Nearly half of S&P 500 companies mentioned ESG topics when announcing their Q4 2017 results1. This increasing investor interest is also evidenced by the growth of sustainably invested asset volumes. According to the Global Sustainable Investment Alliance2, global responsible investing totals around USD 23 trillion – having risen 25% since 2014.

Hence, asset managers, banks, rating agencies and consultancies have published an increasing number of research papers and market overviews on the topic. UBS3, for example, states that ESG integration “does not detract from investment performance and can actually enhance returns.” JP Morgan4 finds that stocks with higher ESG scores tend to perform better. Nordea’s research5 shows that “a high ESG focus contributes to risk mitigation.” And finally, ESG risks and opportunities can also affect credit ratings. S&P Global Ratings disclosed in a report last year that environmental and climate concerns were taken into account for their credit analysis and had directly impacted numerous companies’ ratings (more than 100 cases between July 2015 and August 2017)6.

Our publication slightly differs in nature in that it shares first-hand insights of what we have learned in the process of implementing ESG criteria: firstly, we can confirm that the economic case for ESG investing is a valid one. Secondly, we provide insights into how ESG considerations have been reflected in our investment portfolio. Special focus in our analysis is given to corporate credit investments. The publication covers both active investment mandates as well as buy-and-hold mandates. The latter refers to mandates which are designed to provide stable investment income and diversification with virtually no portfolio turnover, highly relevant for life re-/insurance companies.

1 “A Revolution Rising - From low chatter to loud roar”, Goldman Sachs, April 20182 “2016 Global Sustainable Investment Review”, Global Sustainable Investment Alliance, March 20163 “Exploring ESG Investing – A Quant’s Perspective”, UBS, December 20174 “Lighting the ESG Path”, JP Morgan, September 20175 “Cracking the ESG code”, Nordea, September 20176 “How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its

Ratings Analysis”, S&P Global Ratings, November 2017

Introduction

4 Swiss Re Responsible investments – The next steps in our journey

Swiss Re’s ESG strategy is characterised by a three-pillar approach: Enhancement, Inclusion, Exclusion.

With Enhancement, the target is to increase the overall ESG rating of our investment portfolio, next to executing our voting rights and considering ESG aspects in our manager selection and monitoring process. This is achieved by introducing benchmarks for our active listed equities and credit portfolios and minimum rating thresholds for the buy-and-hold investments.

The second pillar of our strategy is based on Inclusion and involves thematic investments having a positive impact on society and the environment such as green bonds and infrastructure renewables.

Thematic investments continue to grow: last year, around USD 160 billion green bonds7 were issued across multiple sectors, currencies and markets. In 2017, the International Capital Market Association (ICMA) published a similar set of guidelines for social bonds as available for green bonds and guidelines for sustainability bonds. Sustainability bonds “use of proceeds” are applied to finance or re-finance both green and social projects. However, the amount of social and sustainability bonds outstanding is still relatively small at USD 35 billion8.

7 The Climate Bond Initiative, https://www.climatebonds.net, June 20188 J.P Morgan data, 2018

Swiss Reʼs approach to responsible investing

Source: Swiss Re


Switch to broad-based ESG benchmarks focusing on higher ESG-rated investments

Enhancement

Exclusions based on the internal Sustainable Risk Framework. Avoid investments related to thermal coal

Exclusion

Focus on themes and create related mandates, such as green bonds, renewable or social infrastructure

Inclusion

Systematic integration of ESG considerations into investment

process and portfolio

As part of Swiss Re’s Inclusion pillar we also invest in infrastructure loans, an attractive asset class for an insurance portfolio given its credit quality and inherent liquidity premium. The infrastructure loan portfolio allocates close to 50% to renewable energy and social infrastructure loans by number of projects (see illustration). Given the individual nature of infrastructure loans, the investment due diligence process has been enhanced by applying an ESG questionnaire to identify relevant risk and impact characteristics for individual transactions and to systematically consider ESG criteria.

Swiss Re’s approach to Exclusion is based on the internal group-wide Sustainability Risk Framework. The framework sets company-wide criteria for what is being considered as acceptable business based on its adaption to a sustainable future. In addition, in 2016, we started to divest from companies that generate 30% or more of their revenues from thermal coal mining or that use at least 30% thermal coal for power generation. The decision was taken to mitigate the risk of coal related assets becoming devalued or “stranded” over the long-term. The decision resulted in over USD 1.3 billion divestments and a significant decrease in carbon intensities in both the credit and the listed equity portfolios.

*Energy, Regulated Utilities and Transportation

53%Others*

26%Renewable energy

21%Socialinfrastructure

Renewable energy

Social infrastructure

Infrastructure loan portfolio per end of March 2018

29%wind farms

projects

36%schools/student dorms projects

27%affordable

housing projects

18%hospitals projects

18%street lights

projects

71%solar farms

projects

Source: Swiss Re


Swiss Reʼs approach to responsible investing

To incorporate ESG considerations across the entire asset portfolio has proven to be an ambitious goal, given the different nature of the various asset classes and the lack of best practice for some of them. As highlighted in Giese et al.9, institutional investors have rarely integrated ESG considerations consistently across all asset classes, emphasising the need for a holistic approach.

Limited experience could be one of the reasons for the reluctance of institutional investors to apply ESG criteria. While some research on ESG performance has been produced for liquid asset classes such as corporate bonds10 and listed equities11, less insights are available on government bonds, private equity and real estate, although they represent a considerable portion of assets under management (AuM) for a large number of institutional investors.

Figure 1 provides a high-level overview of the major asset classes in Swiss Re’s investment portfolio and shows how ESG factors affect the portfolio construction for each asset class.

9 “Foundations of ESG Investing”, Giese et al., MSCI ESG Research LLC, 201810 “ESG Ratings and Performance of Corporate Bonds”, Desclée et al., Barclays Quantitative Portfolio

Strategy Paper, 201611 “ESG – Environmental, Social & Governance Investing”, Khuram et al., JP Morgan Global Quantitative &

Derivatives Strategy Paper, 2016

ESG across all asset classes


Government bonds

Credit

Listed equities

Private equity

Real estate

Investments hold an ESG rating of BB or better

Green bond mandate considering ICMA Green Bond Principles

Active mandates benchmarked against ESG BB and Better indices with limited leeway to deviate from the benchmarks

Reinvestment universe of buy-and-hold mandates restricted to ESG rating BB or better

ESG inclusion in infrastructure loans

New investments are only made into Private Equity funds, which adhere to ESG guidelines

Swiss Re reviews ESG performance and compliance for each potential investment

ESG regarded as an important metric for the portfolio. Attractive initiatives that offer a high ESG impact are considered for both new acquisitions and the existing portfolio

Benchmarked against different sustainability standards depending on the location of the property (Minergie standard, GreenGuide best practice, GreenPrint Environmental Management Platform, LEED certifications, GRESB scoring)

Global Equity mandates are benchmarked against MSCI ACWI ESG Leaders Index: portfolio managers are assessed against outperformance as well as ESG quality of the portfolio

Figure 1 Overview of major asset classes in Swiss Re’s asset portfolio and ESG considerations


ESG across all asset classes

As a reinsurance company, asset-liability management (ALM) and the replication of reinsurance reserves lies at the core of our investment decisions: for this reason, it comes as no surprise that bonds represent the asset class with the largest weight in our asset portfolio12.

In spite of the importance of government bonds in institutional investors’ portfolios, at the time of writing, there is little analysis investigating the impact of ESG considerations for a government bond portfolio. A recent research piece13 by the investment manager PIMCO highlights the importance of ESG for sovereign risk illustrating how environmental, social and governance factors directly and indirectly affect the probability of default of a sovereign issuer. “This should come as no surprise: Moody’s Investors Service reports that ‘about 30% of past sovereign defaults have been directly related to institutional and political weakness, ranging from political instability to weak budget management and governance problems or to political unwillingness to pay.”, writes PIMCO. While such qualitative considerations are economically and theoretically sound, there is only limited empirical data of sovereign defaults to provide a robust statistical analysis.

In absence of empirical data, we have chosen an approach for government bonds inspired by our experience in the buy-and-hold corporate bond portfolio: an ESG rating of BB and better is acceptable. ESG ratings range from AAA (best rating) to CCC (lowest level) and express the specific ESG risk of a company or a country relative to its peers. Any exception to the minimum rating would be driven by asset-liability matching considerations.

Our credit portfolio consists of different sub-asset classes and investment styles. In corporate credit, we have both active and buy-and-hold mandates. We work with minimum ESG ratings and, as for all asset classes, adhere to Swiss Re’s Sustainability Risk Framework. In the next section, we will provide a detailed account of the methods and results for both areas.

Swiss Re also holds credit investments in the form of securitised products: in order to evaluate the ESG quality of the portfolio, we have adopted a look-through approach which means we are assessing the ESG risk of the underlying collaterals and originators. With this method we have estimated the ESG quality of the securitised portfolio to be equivalent to a BBB rating. In addition to this, we have included green asset-backed securities (ABS) as part of our inclusion pillar, and excluded securities in breach of our group-wide Sustainability Risk Framework.

For listed equities, we selected the MSCI ACWI ESG Leaders Index as the relevant benchmark to define the asset allocation. It sets the stage to evaluate our own portfolio, by addressing the question of how we performed relative to the benchmark on financial performance and on ESG quality.

The ESG strategy for the Swiss Re private equity (PE) portfolio ensures that PE funds in the portfolio have ESG guidelines, which are applied to new investments in such funds. As Swiss Re’s PE mandate is supported by external managers, an agreement has been reached requiring them to adhere to ESG guidelines and exclusion lists as well as taking ESG considerations into account in their investment process. For each potential fund investment, we review the ESG performance and compliance conducted by the external manager and request that the fund’s investments are in line with Swiss Re’s ESG requirements.

12 Swiss Re Investor and Analyst Presentation – Annual results 2017 13 “Applying ESG Analysis to Sovereign Bonds”, Rahman, PIMCO research paper, 2018

Asset-liability management lies

at the core of our investment

decisions


In our real estate portfolio, we generally consider potential investments offering a positive ESG impact in combination with attractive risk-adjusted returns.

The Swiss and the German portfolios are measured for sustainability performance through energy source tracking. Furthermore, the Swiss portfolio is assessed against the Swiss Confederation supported Minergie14 standard, which is earned for new and/or refurbished buildings that meet certain sustainability criteria. The Swiss Re real estate team has taken a proactive approach to increase the proportion of properties using renewable energy sources as well as satisfying Minergie standards.

In the US, our priority has been to improve the sustainability performance and scoring of the portfolio in accordance with a variety of standards, including GreenGuide, Greenprint, LEED (Leadership in Energy & Environmental Design), and the investor-driven ESG benchmark, GRESB (Global Real Estate Sustainability Benchmark). As a result of our commitment towards sustainability, we are proud to have achieved an outperformance relative to the GRESB benchmark with a portfolio score of 71/100 vs 63/100 for the benchmark.

14 https://www.minergie.ch/

Deep dive: Corporate credit investments

10 Swiss Re Responsible investment –Shaping the future of investing

Last year, we switched the corporate credit portfolio to ESG based benchmarks and ESG minimum rating thresholds. The choice of the relevant benchmark was the key decision we had to take. Due to the various considerations outlined below, we selected a benchmark targeting companies with an ESG rating of BB and better. But, does our choice still hold up to the test a year later?

ESG benchmarks

To be able to verify the right selection of the ESG benchmark, we are comparing the index characteristics of three different benchmarks – all of them are from the Bloomberg Barclays corporate bond index family:

Bloomberg Barclays US Corporate Intermediate (traditional)

Bloomberg Barclays MSCI US Corporate Sustainability Intermediate (ESG rating of BBB and better – ESG BBB+)

Bloomberg Barclays MSCI US Corporate Sustainability BB and Better Intermediate (ESG rating of BB and better – ESG BB+)15

We focus the analysis of the benchmarks on intermediate securities, i.e. securities with a time-to-maturity below 10 years, the relevant investment universe for our active credit mandates. We analyse the benchmarks by assessing the ESG quality, the current composition as well as the historical risk-return development.

ESG ratings

There is an obvious difference between traditional and ESG indices, which lies in the consideration of ESG ratings. By overweighting ESG leaders and underweighting ESG laggards (0% allocation to the latter in both ESG indices), the ESG profile and overall ratings are superior for ESG indices. The ESG case also holds when looking at the average constituents’ rating for E, S and G.

15 Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Bloomberg Barclays US Corporate Int. (Traditional)

Bloomberg Barclays MSCI US Corporate Sustainability Int. (ESG BBB+)

Bloomberg Barclays MSCI US Corporate Sustainability BB and Better Int. (ESG BB+)

ESG Ratings

Key Integration Metrics:

Avg. ESG Rating BBB/BB A/BBB A/BBB

ESG Leaders (AAA-AA) (%) 15% 26% 18%

ESG Laggards (B-CCC) (%) 18% 0% 0%

ESG Ratings:

Environmental Score 6.3 6.7 6.6

Governance Score 5.0 5.3 5.2

Social Score 4.5 5.1 4.8

As of April 30th, 2018

Bloomberg Barclays US Corporate Int.(Traditional)

Bloomberg Barclays MSCI US Corporate Sustainability Int.(ESG BBB+)

Bloomberg Barclays MSCI US Corporate Sustainability BB and Better Int.(ESG BB+)

# Issuers 936 510 703

Market Cap (in USD bn) 3395 1 918 2 704

Credit Rating: BAA1/A3 A3/BAA1 A3/BAA1

AAA-AA (%) 10% 12% 10%

A (%) 42% 46% 46%

BBB (%) 47% 42% 44%

Analytics:

Yield (in %) 3.6 3.5 3.6

Spread Duration (in years) 4.3 4.2 4.2

Option-adjusted spread (in bps) 86.4 79.9 83.2

As of April 30th, 2018


Current index characteristics

The superior ESG profile comes at a price – the number of index constituents. The Sustainability Index reduces the number of constituents by more than 40%, while the ESG BB+ benchmark reduces the universe by 25%. The credit rating quality for both ESG based benchmarks is higher. While the duration and yield are largely unchanged, the higher quality results in a minor reduction of the option-adjusted spread, which measures the spread between a fixed-income security rate and the risk-free rate of return.

Table 1Key ESG characteristics of Traditional vs. MSCI Sustainability Indices

Table 2Key index characteristics of Traditional vs. MSCI Sustainability Indices

12 Swiss Re Responsible investment –the next steps in our journey

Risk and return profileIn line with the improved credit quality, all relevant risk metrics such as standard deviation or value at risk (VaR) drop for both ESG-based benchmarks against the traditional index. Across the board, risk reduction was slightly stronger for the ESG BBB+ benchmark.

In addition, while not indicative of the prospective results, both ESG indices experienced better performance on a risk-adjusted basis than the traditional index during the last five years. This is mainly driven by the lower risk, expressed by a smaller standard deviation. The excess return itself provided a mixed picture. While the ESG BB+ performed slightly better than the traditional index, the ESG BBB+ underperformed.

Deep dive: Corporate Credit Investments




Risk Metrics

Standard deviation (in % annualised) 1.48% 1.26% 1.36%

VaR @ 99% –3.6% –2.9% –3.1%

Maximum drawdown (in %) –2.5% –1.7% –2.0%

Max drawdown period (in months) 18 18 18

Skewness 0.0 0.0 0.1

Excess kurtosis 2.6 2.0 2.0

May 2013 – April 2018, monthly data

Table 3Excess return risk characteristics of Traditional vs MSCI Sustainability Indices




Excess return (in bps) 134 129 136

Standard deviation (in bps) 148 126 136

Information ratio 0.91 1.02 1.00

May 2013 – April 2018, monthly data, annualised values

Table 4Key performance statistics of Traditional vs MSCI Sustainability Indices

Swiss Re Responsible investment –the next steps in our journey 13

The attribution analysis in Figure 2 provides insights into the drivers behind the stronger performance of the ESG BB+ index relative to the traditional benchmark. In terms of credit ratings, the ESG index holds an underweight in BBB rated securities and an overweight in higher rated securities (see Table 2). Over the last five years, the credit rating position led to a sizeable underperformance of the ESG benchmark against the traditional benchmark. But the analysis also highlights the strong positive contribution of ESG driven security selection which resulted in an outperformance of the ESG BB+ Index of 1.2 bps per annum relative to the traditional benchmark.

The positive security selection is notable. With the increased focus on ESG criteria, there is a considerable difference in credit rating development between the two indices.

Figure 3 illustrates the rating development statistics for the indices in scope: from April 2017 until April 2018, the ESG index have seen 1.6% fewer downgrades than the traditional index, and only 0.2% fewer upgrades.

This analysis of the indices confirms our preference for the ESG BB+ benchmark for our active US corporate bond portfolio. The lower credit migration further supports the choice of the ESG BB+ rating threshold for reinvestments in our buy-and-hold investments.

Figure 2 Attribution analysis of US ESG BB+ benchmark against traditional index

Figure 3 Credit migration analysis of ESG BB+ benchmark against traditional index

Attribution analysis May 2013 – April 2018

Credit rating positioning

-8

-6

-4

-2

0

2

AAA-AA A BBB Securityselection

Total

bps

p.a.

-0.2%

8.3%

8.5%

-1.6%

9.3%

10.8%

-4.0% 0.0% 4.0% 8.0% 12.0%

Impact ESG switch

US Corp ESG BB+ Int

US Corp Int

Credit Rating Downgrades Credit Rating Upgrades

Credit migrations, April 2017 – April 2018


Our experience But choosing benchmarks is just the first step. There are still many questions open with respect to the implementation of responsible investments in an institutional portfolio, which we aim to answer based on the live performance of our investment mandates.

Active outperformance capabilities

A switch from traditional to ESG indices results in a considerable reduction of the investment universe. Our investment managers are expected to make active investment decisions to outperform the given benchmark. A key question is therefore how much leeway to deviate from the benchmark universe should investment managers have. We have conducted some analysis in order to strike an optimal balance between sustainability and performance.

On the one hand, a restriction in the opportunity set for active managers might hamper their outperformance potential and diversification benefits, on the other hand, a large leeway would jeopardise the sustainability strategy bringing limited progress in terms of ESG quality.

After a little more than one year since the transition, we think it is the right time to look at the numbers and assess if we have identified the sweet spot between sustainability and financial performance, or whether our strategy needs some additional fine tuning.

Figure 4 Outperformance April 2017– April 2018 and percentage of securities with ESG rating below BB


ESG Pilot

Traditional Mandate

ESG BB+ Mandates

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

% o

f se

curi

ties

bel

ow E

SG

BB

Outperformance (in bps)

Bubble size represents NAV

0 5 10 15 20 25 30 35 40 45

Active performance overview (April 2017 – April 2018)


The chart in Figure 4 illustrates the relationship between mandate outperformance and the holdings in lower ESG rated securities. In this analysis we have considered three different types of mandates:

Traditional Mandate with no ESG restrictions

ESG Pilot Mandate with the investment universe limited to issuers in the US Corporate Sustainability Index (ESG BBB+)

ESG BB+ Mandates with the investment universe limited to issuers in the US Corporate Sustainability BB+ Index and a modest leeway for off-benchmark securities

While the ESG BB+ mandates represent the new standard for active credit mandates, we kept both the Pilot as well as the traditional mandate for comparison purposes.

We note that the highest outperformance has been achieved in the ESG BB+ mandates, which allow a limited leeway in off-benchmark positions, while the additional restrictions of the investment universe in the ESG Pilot Mandate have resulted in a lower outperformance.

Besides outperformance, an important criterion to select our investment managers is their ESG expertise. This represents an additional reason to grant them some leeway, as they conduct their own assessment of the ESG risks. The investment philosophy of the active mandates is to utilise the leeway for securities expected to either soon move into the ESG benchmark universe or where ESG risk is deemed low based on the managers’ views. As confirmed by the empirical data, this facilitates the generation of additional excess return while not detracting from improving the mandates’ ESG quality.

On the basis of such results, we can conclude that with an appropriate set-up, a move to ESG benchmarks does not impede the potential for credit managers to add outperformance.

Overall, not surprisingly, the ESG quality improved. The average MSCI ESG score across these managers improved from 4.4 (in Dec 2016) to 5.6 (in Apr 2018). The traditional benchmarked mandate had a considerably lower ESG score, although the manager also improved the mandate’s average ESG score since January 2017.

Figure 5 Portfolio ESG score development over time

3.0

3.5

4.0

4.5

5.0

5.5

6.0

ESG BB+ Mandates Traditional Mandate

Dec

16

Feb

17

Apr

17

Jun

17

Aug

17

Oct

17

Dec

17

Feb

18

Apr

18

ESG score

Outperformance potential maintained

with ESG benchmarks


Turnover characteristics in active mandates

Another important dimension for actively managed mandates is the portfolio turnover, which ultimately results in transaction costs and operational overhead. While it is valuable to look at this metric on the index level as we have done in our benchmark selection process and in our previous publication on responsible investments16, it is equally insightful to analyse actual turnover data from the active mandates, as it is a more accurate indicator of transaction costs and operational effort.

ESG rating integration generates additional fluctuations in the constituents of ESG indices; for this reason the ESG benchmarks have a higher index turnover. However, it is far from obvious how much of that additional turnover results in actual trading in an active mandate.

As shown in Figure 6, the portfolio turnover pre- and post-transition stayed largely unchanged, mainly as a result of the benchmark leeway given to managers, as they might use the leeway to keep the already selected securities.

Further, the concentration of the investment portfolio has originally been a consideration, given the smaller universe of the ESG benchmark. However, the experience over the last year showed no change in concentration for our active mandates.

Experience in buy-and-hold mandates

The ESG credit approach also covers the buy-and-hold portfolios. The starting point for our investment process is always our reinsurance and insurance liabilities that need to be matched: buy-and-hold portfolios are held to back longer-term and highly predictable liability cash flows.

We manage these investment portfolios with a conservative risk appetite to provide a high level of stability in investment results, with particular attention to default, downgrade, and impairment risks.

In contrast to the active portfolio, the buy-and-hold credit portfolio is managed with a hold-to-maturity approach. Turnover is low and primarily to accommodate sales of credit concerns and for reinvestments of proceeds. With the implementation of the ESG strategy last year, all new investments need to have a minimum ESG rating of BB.

16 “Responsible investments – Shaping the future of investing”, Swiss Re, 2017

Figure 6 Average monthly portfolio turnover of active mandates pre- and post-transition to the ESG benchmarks


0.0 %

0.5 %

1.0 %

1.5 %

2.0 %

August 2016 ‒March 2017

April 2017 ‒ December 2017

Average monthly turnover


Through selective rebalancing and reinvestments of proceeds into ESG higher-rated companies, we achieved an increase in the ESG score (from 5.0 to 5.5), and a considerable reduction in low-rated ESG holdings (from 33% to 18%) in our buy-and-hold mandates.

The finding that the ESG index had fewer credit downgrades (see Figure 3) is also highly relevant for the buy-and-hold portfolios: while these mandates do not specifically track any benchmark, this analysis shows that higher ESG quality is likely to result in a more favourable credit migration profile, a highly desirable feature for buy-and-hold mandates.

Assessment after one year

In summary, our assessment after having moved to ESG benchmarks as well as ESG minimum rating thresholds is that we improved the ESG quality substantially across the corporate credit portfolio without any material compromise on financial performance. This improvement leads to a more resilient investment portfolio with lower volatility and lower credit migration risks.

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Dec

16

Feb1

7

Apr

17

Jun1

7

Aug

17

Oct

17

Dec

17

Feb1

8

Apr

18

Aggregate Buy-and-Hold Managers

0%

10%

20%

30%

40%

Dec

16

Feb1

7

Apr

17

Jun1

7

Aug

17

Oct

17

Dec

17

Feb1

8

Apr

18

Aggregate Buy-and-Hold Managers

ESG score ESG B-CCC-Nr securities

Figure 7ESG score development of buy-and-hold managers

Our wish-list: accelerating the adoption of ESG


ESG makes economic sense by improving the risk-adjusted return profile over the long-term, particularly for credit investments. However, there are continued challenges to be addressed to support a broader move by investors towards responsible investing.

Our previous report outlined some of the key impediments that prevent ESG from becoming a standard approach across the industry. In the past months, many of these obstacles have been taken up by regulators, governments and other organisations.

The following overview summarises our assessment of progress made so far:

Major hurdles for responsible investing to become mainstream

Key developments Assessment

1. Lack of broad-based agreement on methodologies and standards

Strong commitment on both G20 and European Commission level, with the latter having developed a specific action plan for a common taxonomy on sustainable finance

Green Bond Assessment and Verification Guidelines (PBoC17)

Green Loan Principles (ICMA18)

Significant progress. Next step is implementation

2. Lack of standardised key metrics to be reported on a regular basis

Increased recognition with respect to the UN Sustainable Development Goals (SDG)

FSB TCFD19 recommendations include some climate risk metrics

Limited progress

3. Low importance of ESG in financial analysis

Ongoing considerations from rating agencies to include ESG

Limited progress

4. Low availability and market volume of ESG investment products

Continued increase in product offerings (mainly sustainability / ESG fund products), but market remains fragmented

Some progress, but still low volume

17 The People’s Bank of China18 International Capital Market Association19 Task Force for Climate-related Financial Disclosure


Financial market participants are currently making efforts to provide further clarity on definitions, methodologies and standards related to ESG. However, moving the global asset base towards responsible investing remains a bumpy road with various obstacles still in the way. From our perspective, Swiss Re’s wish list20 remains fully valid.

Since our switch to ESG benchmarks in 2017, Swiss Re has further progressed on its ESG journey, now applying ESG considerations to close to 100% of our investment portfolio. A continued market assessment and specific actions on our investment portfolio have helped to further move towards a consistent responsible investing strategy.

Our analysis shows that the long-term risk-adjusted investment performance continues to be more favourable when ESG criteria are taken into account. With the limited leeway provided to portfolio managers, Swiss Re maintains the outperformance potential while giving the right level of incentives to include ESG considerations in the security selection.

As long as ESG is not yet an integral part of all financial analyses, investors need to make an effort and actively integrate sustainability considerations in their investment decisions. But this should be in every investor’s interest as ESG risk is not fully compensated by the financial markets either. The ability to consistently integrate ESG considerations into the investment process and that the financial markets reflect ESG risk entirely, requires clear definitions and methodologies, as well as regular and standardised reporting on ESG risk. We are encouraged by the experience we have gained with integrating ESG criteria and will further progress on our journey. We expect responsible investing will further advance, enabling us to adapt and improve our current approach. Actively taking ESG into account offers far more opportunities than investors are exploiting today.

Conclusion

20 “Responsible investments – Shaping the future of investing”, Swiss Re, 2017; p. 31

TitleResponsible investments – The next steps in our journey

Authors

Claudia A. Bolli, Michele Doronzo, Gallus Steiger

Gaétan Jacot, Pascal Zbinden

Editing and realisation

Siya Ellerbrock, Katharina Fehr,

Richard Heard

Managing editor

Urs Leimbacher

Layout

Swiss Re Corporate Real Estate & Services /

Media Production, Zurich

Photographs

Getty images, iStockphoto

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