Zurich believes that numerous impact investment opportunities exist across various asset classes. We have committed ourselves to evaluating impact investment opportunities and, over time, to building a portfolio of impact investments. In identifying potential impact investments, we will assess whether the investment meets our definition of impact investing (intentionality – measurability – profitability), supports our impact objectives (mitigating environmental risks and increasing community resilience) and/or, contributes to development of the impact investing market.
However, we also believe that impact investing will only be sustainable as an investment ‘style’ if it can be integrated into our overall approach to investment management. Opportunistic investments can supplement the portfolio occasionally. But in general, we want impact investments to be an integral part of the portfolio, not just one-offs. Consequently, in addition to the criteria already described, we will also assess impact investment opportunities along the following lines:
- Risk and return profile: Is the risk/return profile in line with Zurich’s risk-factor based approach to ALM and strategic asset allocation?
- Scale: Is the universe of assets for a given type of impact investment large enough to define a meaningful allocation, build a diversified portfolio, and re-invest capital over time?
- Structure: Does Zurich, or an institutional-quality external asset manager, have the capability and expertise to manage the asset?
- ESG risks: As with any other investment, we will assess ESG risks associated with the underlying asset as part of a holistic asset selection process. Note that we do not equate ESG performance with impact.
Over the course of 2016, Zurich made good progress in building a portfolio of impact investments:
- Green bonds: In 2014, Zurich announced its commitment to invest up to USD 2 billion in green bonds. By the end of 2016, USD 1.4 billion had been invested in green bonds.
- Socially-themed use-of-proceeds bonds: By the end of 2016, USD 200 million had been invested in socially-themed use-of-proceeds bonds of various issuers.
- Impact private equity: By end of 2016, Zurich had committed USD 105 million to impact investing opportunities in private equity.
- Real estate: Zurich continues to make investments aimed at reducing energy use and carbon emissions of its real estate portfolio.
Zurich’s impact objectives: mitigating environmental risks and increasing community resilience
The basic role of insurance in society is, by pooling risks, to help protect individuals or organizations from the uncertainties of life and the vagaries of our world. Providing insurance protection to individuals frees them from social constraints. Without insurance, individuals remain dependent on the support of the family or community, or risk poverty and destitution. And even in cases where family or community support is available, many shocks will continue to significantly affect the welfare of the poorest. As a global insurance group, serving millions of customers in over 210 countries and territories, and with a rapidly growing footprint in many emerging regions of the world, Zurich and its customers are directly or indirectly exposed to many environmental and social challenges. Not all of these can be mitigated completely by insurance solutions alone.
Through our impact investments we target positive outcomes in two main ways:
- Mitigating environmental risks by supporting a low-carbon economy and encouraging environmentally- friendly technologies
- Increasing community resilience by helping to build ‘community capital’ and addressing the needs of populations that lack traditional means to achieve such goals (the ‘underserved populations’)
At the same time, we also acknowledge that the impact-investment market is still at an early stage of development. The universe of impact investment is limited, albeit growing rapidly, and institutional investor commitment is crucial for the market’s further development. It is also one of our explicit objectives to support the ‘mainstreaming’ of impact investing through collaborative engagement and investments. To support market development and achieve scale and portfolio diversification, we may also support investments targeting impacts beyond those already mentioned.
Mitigating environmental risks: There is strong evidence that climate change is happening, that it is influenced by human action and that it is leading to changes in extreme weather and climate events. Zurich recognizes the risk that environmental issues such as climate change pose to its stakeholders and its business performance. Zurich’s mission is to help its customers understand and protect themselves from risks, such as the risks associated with climate change. Mitigating climate change, and environmental protection more generally, is integral to sustainable value creation for both Zurich and society.
As a signatory to the United Nations Global Compact, Zurich is committed to promoting greater environmental responsibility (UN Global Compact Principle 8) and to encouraging the development and ‘diffusion’ of environmentally-friendly technologies (Principle 9). This includes achieving universal access to modern energy services, improving energy efficiency, and increasing the share of energy generated from renewable resources.
Zurich will consider impact investments that help increase energy efficiency, generate renewable energy or mitigate climate change and/or protect the environment in other ways.
Increasing community resilience: In addition to the pooling of risk, insurance can also help make communities and society more resilient to unforeseen shocks, for instance by sharing expertise on how to mitigate risks. Zurich’s efforts to help communities reduce the impact of floods as part of our flood resilience program are an example of how we use our expertise to increase the resiliency of communities.
However, resilience should not be viewed too narrowly. A holistic approach is required – one that takes into account communities’ needs. A white paper published by Zurich on flood resilience states that “to be effective, resilience activities should encourage efforts to maintain and raise the standard of living of those affected by [disaster].” An effective way to supplement more narrow measures of resilience is to look at community capital, or ‘the five Cs’: physical capital (infrastructure, equipment; etc.); financial capital; human capital (health, etc.); social capital (social relationships and networks, etc.); and natural capital. Sustainable economic growth and well-being go hand-in-hand with risk preparedness.
Zurich considers impact investments that help to build community capital and make goods and services more accessible to populations that are not adequately served by traditional investment means.