CIO Profile: Why Zurich wants to Lead the Way on Impact Investing

(December 9, 2013) – Impact investing is here to stay, and Zurich’s CIO plans to be at the forefront of the movement.

Cecilia Reyes told aiCIO Zurich wants to be recognised as a leader in the relatively new space of impact investing, and that she had three goals she wanted to achieve while in her current role.

“We have an aspiration to be a leader in responsible investing, and we can fulfil that aspiration by being a thought leader in impact investing,” she said.

Impact investing takes social, responsible investing (SRI) or environmental, sustainable, and governance investing (ESG) a step further and sees capital allocated to distinct projects that aim to improve the world around us.

“Right now, it’s still at its infancy stage: our goal is to move it into the mainstream,” said Reyes.

“We also want to attract interest from other institutional investors, and to raise impact investing’s profile. We want to demonstrate there is this space within fixed income where investors can channel their allocation towards impact investments.”

Reyes also wants to raise interest levels from security issuers. “We are seeing it happening already: green bonds were developed in 2008 through the World Bank, and since then the market has grown, but we want it to grow much faster,” she said.

The third of Reyes’s goals is to make the evaluation, reporting, selection, and measurement of how green an infrastructure investment is “much more robust”.

Reyes has come good on her intentions—last month she announced Zurich would invest up to $1 billion in green bonds issued by the World Bank, International Finance Corporation and other development institutions.

This $1 billion is being allocated away from US government bonds—an investment which has produced minimal returns in recent months. For Reyes, the green bonds are not only attractive for being a good fit in terms of strategy; they are also part of a much wider ethos of being a responsible investor.

“At this stage, they’re mostly AAA-rated and from a credit quality perspective, these bonds offer a minimal amount of risk. They’re very well suited as part of our overall strategy on fixed income, they sit within the highest quality portion of our fixed income,” she said.

“But the purpose of green bonds goes beyond that. It is part of our strategy to be a responsible investor—being a responsible investor is a demonstration of the social value of Zurich as an insurance company. It’s all about doing well and doing good.

“These are investment opportunities that generate returns commensurate with risks so we can fulfil our responsibility for financial value creation, while also generating a positive impact on the environment by helping communities to mitigate the impact of climate change or helping communities to adapt to climate change.”

Zurich also adopts an impact investing approach when it comes to its real estate portfolio. Within its direct real estate portfolio, Reyes has sustainability and energy efficiency targets.

“Ensuring we mitigate the carbon emissions from our real estate investments, and ensuring we fulfil our sustainability targets there is another example of integrating environmental, social and governance (ESG) factors in our strategy,” she said.

Reyes also insists her in-house asset managers integrate ESG factors into their investment process. “It should drive their security selection decisions through those risk factors,” she said. “Our external asset managers are certainly way ahead of our internal asset management unit, but we’re making strong efforts to be on a par with our external managers in this space.”

Reyes runs a $208 billion fund for the insurers’ liabilities, and currently has 85.7% of the portfolio in fixed income, with another 3.4% in equities, 5.5% in real estate, 1.2% in alternatives, and 4.2% in cash and other short-term investments.

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Zurich’s investment strategy has remained consistent over the past few years, driven by a robust asset liability management framework.

Reyes also implements derivatives where risks cannot be mitigated by cash assets alone. A good example is the convexity risk—the sensitivity of the duration of a bond to changes in interest rates—that she has in her German life portfolio.

“No matter how hard we try to seek out investments with the right interest rate convexity structure to match the convexity of the liabilities, we can’t. So we’ve resorted to using interest rate swaption,” Reyes said,

“We have had a portfolio of euro-denominated interest rate swaptions for several years now with the sole purpose of mitigating the negative convexity profile we have on the liability side of our German life book.

“We see it also in our life business in Switzerland. We were way ahead in implementing a swaption strategy in Switzerland. As you know, interest rates fell much lower ahead of time in Switzerland than in Germany.

“So in anticipation of managing that risk we implemented the strategy in Switzerland and then replicated it afterwards in Germany. I think the Switzerland one was in 2006, and in Germany it was 2010.”

Around 60% of the overall investment portfolio is managed by external asset managers—a relatively high proportion for an insurer.

The 40% that is managed internally is primarily the pension fund’s real estate portfolio, the mortgage portfolio—which covers direct mortgage underwriting in Switzerland and Germany—and a selection of individual funds and alternative investments, such as private equity and hedge funds. Emerging markets assets are still primarily managed by internal managers too.

Asked what concerns her for the future of her fund, Reyes says it is now more important than ever to continually assess the macroeconomic climate in which investors are finding themselves.

“Now we’ve gotten out of these very challenging times, it is relatively positive in terms of the outlook. But we have to be very alert as we transition from a liquidity-driven investment environment into a more fundamental earnings-driven environment,” she said.

“That transition could be full of unforeseen risks. That’s what’s keeping our eyes wide open. We need to be able to anticipate the risks.”