An interview with Zurich: ‘We would no longer select an asset manager that doesn’t know how to vote’

This time last year, Zurich Insurance became the first investor to answer Christiana Figueres’ call for green investment targets. In September 2017, the former UN climate negotiator told PRI in Person that 1% of investment portfolios should be in green by 2030.
“Dear Christiana Figueres, we accepted your challenge and we are proud to report that we have 1.4% of our asset under management invested in #greenbonds,” Zurich announced one year later on social media.
Since then, its green investments have gone up further. Group Chief Investment Officer Urban Angehrn tells RI that Zurich’s impact investment now stands at $4.4bn, including $3bn of green bonds and $501m of social and sustainability bonds.

‘The entire ‘additionality’ question is not an overly useful or fair one’ – Köb

The $200bn asset owner’s reliance on bonds to meet the pledge has garnered scepticism from some, however, who argue that Figueres’ challenge was about financing decarbonisation – something not easily achieved through the bond markets. In a discussion paper issued last May, think tank 2° Investing Initiative argues there is little evidence that green bonds “contribute – or can without further enhancement contribute – to scaling up the investments in green projects”, taking a jab at the “many investors who buy green bonds [and] present this as a climate/environmental ‘action’, ‘contributing’ by ‘financing’ the transition to a green economy”.
It’s an argument that Zurich’s Head of Responsible Investment, Johanna Köb, is used to hearing, and one she and Angehrn have given a lot of thought to.
“Look, of course green bonds have limitations, because they’re typically refinancing instruments. So yes, some of the assets already exist. But the entire ‘additionality’ question is not an overly useful or fair one: our experience is that the additionality from these investments lies elsewhere.”
She says issuing a green bond requires institutions to bring together treasuries and strategy departments with sustainability experts, which can lead to broader discussions about ESG. “And a green bond may focus on everything a company already has, but if the deal is a success then the question will inevitably be, ‘can we create more?’ We mustn’t underestimate the impact of that.”
The other ‘soft’ impact of green bonds is the innovation it has generated in the financial industry itself. “Green bonds started the process of social and sustainability bonds, and then green and social loans, and then sustainability-linked instruments, where pricing actually changes depending on ESG performance,” points out Köb, adding that they have also led to developments in transparency and disclosure in capital markets, which have been influential beyond just green bonds. “That’s the context in which green bonds should be viewed – not as an asset class that will single-handedly pull in all the money needed to save the world.”

‘There’s a downside to all the innovation, which is the proliferation of concepts that confuse things rather than helping investors keep their heads on straight’ – Angehrn

There is one, more recent innovation that both Köb and Angehrn admit they’re sceptical about, though. Last month, the world’s first major ‘transition’ bond was issued by beef producer Marfrig. It was arguably a marketing disaster for the firm, which received a slew of negative headlines from the deal; but nevertheless, it’s a sign of things to come. Fellow insurance heavyweight Axa has already issued guidelines to spur on the asset class, and told RI in July that it “firmly believe[s] in the need for transition bonds”.
Zurich is less bullish.
“It’s a thing to celebrate, that the responsible investment space is so innovative nowadays,” says Angehrn. “But there is a downside to that innovation, which is the proliferation of concepts that confuse things rather than helping investors keep their heads on straight.“We, as an industry, need to find the balance between innovation and the level of standardisation that’s needed to mainstream these ideas.”
He’s quick to add that it’s not that Zurich is opposed to investing in the transition. Some investors want the ‘green’ label reserved for pure green assets, protecting it against more nuanced ideas of climate-alignment that could encourage greenwashing, but Angehrn doesn’t feel that way.
“My main question about the ‘transition’ label is, is it really different? Isn’t the ‘green’ label enough to capture what’s needed? If an issuer in a high-emitting sector sells a bond to help catalyse a transformation then it’s helpful – it’s what we’re looking for as an investor. The point is, it’s still a green bond. We’re not convinced a new concept is really necessary.”
Whatever form they take, use-of-proceeds bonds are part of what Zurich terms the ‘impact’ pillar of its sustainability strategy, which also includes more than €740m in ‘impact’ infrastructure – direct debt financing for renewables, schools, hospitals, low-carbon transport and social housing – private equity, and real estate portfolios with carbon reduction targets.

‘If I’m hiring a manager to run gilts for me, frankly, ESG integration is irrelevant’ – Angehrn

Another pillar of Zurich’s strategy is ESG integration.
“Now, that part I find harder to explain,” says Angehrn, laughing that – as well as being more complex than the impact allocation element – “it also creates a lot less marketing headlines!”. He describes it as the consideration of ESG issues “for each of the major steps of all our investment processes” – not a simple task when your total investment portfolio is nearly $200bn across everything from emerging markets equities to commercial real estate.
Is it essential in every asset class?
“It depends on the asset class. In government bonds, there’s not a lot for us to do, because we rarely have room to choose whether or not to invest. There is, for example, one option if we want sterling sovereign bonds. And I can have all the climate information there is on the UK, but I can’t really act on it because, for asset/liability management reasons, I need to hold those particular notes. So, if I’m hiring a manager to run gilts for me, frankly, ESG integration is irrelevant. On the other hand, when we talk about corporate securities, it’s essential. When we hire an active equities manager, we ask for evidence that their analysts and portfolio managers have the requisite training, tools and data to actually integrate ESG considerations into their securities selection – it’s become a key criterion in the selection of our managers.”
There are other ESG requirements for asset managers now too, if they want to run money for Zurich.
“One ‘knock-out’ criterion we have now in public equities is voting proxies: we would no longer select an asset manager that doesn’t know how to vote, or doesn’t have the systems in place to execute those votes,” explains Köb.

The third and final pillar of Zurich’s ESG strategy is known as ‘advancing together’ and covers initiatives and collaborations.
“There are some competitive advantages to doing things on our own and being ahead on ESG,” says Köb, pointing to the ability to attract and retain new talent, as well as performance and marketing perks. “But there are some basics that we need to cover as a whole community instead, like improving data and research. And there’s really no point in not sharing those things.”
That was the thinking behind the publication of Zurich’s impact methodology earlier this summer. It worked with BlackRock to develop a framework to measure the environmental and resilience effects of its impact investment portfolio, which it has shared with the market in the hope it will be picked up and used elsewhere.
“Climate change is the major global risk, and it affects us on both the asset and the liability side,” says Angehrn. “We need to work together as an industry to tackle it. But there is no doubt now that the train is in motion.”