| By Elena Johansson
The industry is still on a “collective journey” regarding evolving data and metrics, an expert at Zurich Insurance Group who is involved in developing these has said.
Johanna Köb, Head of Responsible Investment at Zurich, expects that investors will move more towards a forward-looking “pathway perspective” to assess which company “is going where and how fast and when”.
She commented that “you learn to understand what [target] is feasible, what is not, and also to have an opinion on the probability of [companies] hitting the target or the probability of default”.
Decarbonising by 2050
Zurich, a member of the UN-convened Net-Zero Asset Owner Alliance (NZAOA) representing $6.6 trillion in assets under management, pledged to decarbonise its $226.4 billion investment portfolio by 2050.
It has also recently declared to decarbonise its underwriting portfolio to net zero by 2050, as a co-founder of the newly launched Net-Zero Insurance Alliance (NZIA).
To implement the net zero pledge, NZAOA members are looking for forward-looking metrics and updated related methodological principles in November 2020.
In its Inaugural 2025 Target Setting Protocol from January, the NZAOA also said it sees large potential in temperature alignment methods to incorporate forward-looking data systematically, even if these methodologies are still evolving.
Metrics and impact measurement framework
Metrics are an area that Zurich has been actively driving. It developed with BlackRock an impact measurement framework in 2019 as part of its responsible investment strategy.
At the end of 2020, Zurich’s impact investment portfolio totalled $5.8 billion.
It also advised on the methodology of setting up science-based targets. The initiative that created the targets included the think tank 2 Degrees Investing Initiative, UK consultancy Ecofys, and the Science Based Targets initiative, and was coordinated by the World Resources Institute.
Based on this work, the insurance firm pledged in March to reduce for example the intensity of emissions of listed equity and corporate bond investments by 25% (tons CO2-equivalent per USD million invested) by 2025.
Striking a balance
Zurich applies ESG integration only to asset classes where sufficient ESG information is accessible, and portfolios offer frequent turnover and a sufficient variety of issuers, according to its 2020 Sustainability Report.
This includes currently active non-‘quant’ equity strategies, active credit, passive investment strategies for equity and credit, private equity and real estate, the firm’s 2021 responsible investment policy writes.
Köb said that the firm is looking at risks and opportunities when it integrates ESG in its investment decisions and balances these.
“We have spent a lot of time discussing what are those levers where you don’t just simply sell, but what can you actually do and how do you balance that.
“And through engagement and financing the transition, you start to decarbonise,” she explained.
Reduction targets for external asset managers
As interim engagement indicators are still work-in-progress, according to Köb, Zurich agrees on reduction targets with its external asset managers who manage about 60% of its assets. The remaining 40% of assets are managed by an in-house team.
“We choose who to engage with based on the percentage of financed emissions a company has in our portfolio, and if they don’t yet have their own science-based targets out there, then that makes them a target,” Köb said, pointing also to collaborative engagement initiatives.
Principal adverse impacts
Zurich has a framework in place to identify and manage material principal adverse impacts.
Since the implementation of its coal, oil sands and oil shale policy in 2017, Zurich has divested $497 millions from companies that operate above its thresholds and do not have credible long‑term transition plans, its 2020 Sustainability Report writes.
But Erwan Malary, analyst at NGO Reclaim Finance, said that the insurer needs to heed the warnings of the International Energy Agency and end all support for fossil fuel developers.
“As it stands, given that its latest policy doesn’t even ensure a timely phase-out of support for the coal sector, Zurich risks falling behind its European competitors,” he said.
Rapid evolvement of the landscape of measures is ongoing as the EU’s sustainable finance regulation develops.
New EU indicators
Köb said that there will be new EU indicators, such as the percentage of EU taxonomy-aligned revenues in capex and opex, which will help investors to assess the status of the transition.
“These numbers, once they are out, will probably always be from the last year, not necessarily forward looking, but they will show you who stands where,” she added.