German insurers have always been a conservative bunch, which is understandable considering that their business is hedging risk. But there are other reasons why they have this reputation, including hierarchical management structures (still) dominated by men and a reluctance to invest as heavily in equities as some others. A legally mandated minimum return on life and pension policies (currently 1.25% per annum) reinforces this.
German insurers are, however, becoming more progressive. One example is the growing diversity within the companies with respect to gender, race and ethnicity. And another big one is the embrace of sustainable investing by GDV, the German insurance association. In a landmark paper published last April, the GDV recommended that its members integrate ESG (environment, social and governance) factors, saying that such integration was not at odds with their need to generate stable investment returns. The paper’s ten co-sponsors included not only Munich Re and Allianz – international giants that signed the Principles for Responsible Investment (PRI) four years ago – but a smaller, more recent convert to the movement called Barmenia.
Based south of the Ruhr valley in the city of Wuppertal, Barmenia offers private health insurance as well as life insurance and pensions. It’s one of Germany’s numerous midsize insurance firms, taking in €1.8bn in premiums last year and looking after a total of €11bn in assets. Barmenia signed the PRI in October 2014, making it the only other German insurer apart from Allianz and Munich Re to do so – so far. “We’ve been a socially-minded firm for some time, so we thought it important to have our investments reflect that,” says Martin Risse, Barmenia’s Chief Investment Officer, who was interviewed recently by Responsible Investor. Citing examples of such socially-mindedness, Risse says his firm insures homeopathic care and in 2000, introduced flexible working hours so that women in particular can combine their careers with family.
Having signed the PRI last fall, Barmenia wasted no time in implementing the principles. In early 2015 it hired Oekom, the Munich-based ESG research firm to help it define ethical criteria for exclusion and apply them to the €11bn portfolio. Barmenia, like other German insurers, invests heavily in fixed income, allocating 77% of assets to high-quality government and corporate bonds. Another 12% of the portfolio is in property, to include direct holdings, funds and mortgage loans. Barmenia’s equity exposure is 8%, with the figure evenly divided by funds that invest in listed companies and unlisted holdings like private equity. Barmenia also invests in renewable energy projects, namely those for wind and solar power. They are another 2% of the portfolio.
The exclusion criteria for corporate debt and equity that Barmenia ultimately settled on are mostly norm-based. They include banned munitions like cluster bombs; violations of human rights or labour rights (e.g. child and slave labour, suppression of unions and gender discrimination); as well as biocides.Risse also says he takes a consequential approach to the exclusions, meaning that neither the company nor its supply chain must be involved with what Barmenia opposes. “Apple is a perfect example. Although the company’s US operation is fine, we exclude them because of the problems in their supply chain,” he says. There have been several reports of labour rights violations among Apple’s Asian suppliers, including failing to pay overtime, making the workplace unsafe and not providing proper training. Apple insists that it has dealt with the problems by drawing up a Supplier Code of Conduct.
Regarding sovereign bonds, the bedrock of Barmenia’s investments, the exclusions are more comprehensive. Countries that violate human and labour rights are not only avoided but also those that discriminate against women, minorities and the disabled. The exclusions also extend to countries deemed authoritarian. “India, Thailand, Bangladesh are all on the list as well as Mexico, which we are still exposed to but will exit once the bonds are repaid,” says Risse.
The exclusions were applied on July 1 via an ESG filter supplied by Oekom. Risse says that while he was concerned that Barmenia’s investment universe would be considerably diminished in the process, it turns out that currently, just 0.2% of its holdings in stocks and bonds have to be jettisoned. Barmenia’s target return on assets from the health care business, which account for around 80% of the portfolio, is 2.75%. The target for the rest of the portfolio – assets from the life and pensions business mostly – is 3%.
On January 1, the second phase of Barmenia’s ESG integration will take effect. According to Risse, this involves taking a best-in-class approach on the part of the portfolio that is managed externally – including the stock funds and private equity holdings. He says: “After allowing for the exclusions, we plan to look at the sectors that are still investable according to our criteria and then decide which of the best 30, 50 or 80 per cent of the group we’d like to invest in.” Barmenia will also be advised by Oekom on the selections, though Risse admits that its minor investments in emerging markets, it can’t really rely on best-in-class. “There is just too little information for that. Best-in-class for the US is fine, but for emerging markets difficult.” Another feature of the second phase is that Barmenia will only work with asset managers that have signed the PRI.
Like other responsible investment stalwarts, Barmenia has a stake in the growing renewable energy market, owning solar and wind facilities in Germany, Spain, Italy and France. It began investing in the space in 2009, or five years before it formally committed to the PRI. Risse says that while Barmenia got hit by the roll-back in solar subsidies in Spain and Italy a few years back, he is still very satisfied with the renewable portfolio, which is generating returns of between 5% and 8%. The managers of the portfolio are Frankfurt-based Palladio Partners and KGAL, Germany’s market leader in renewable funds.
“We even plan on further expanding our renewable exposure to 5% of the portfolio and are looking at further opportunities in wind, solar and water power in the UK and Scandinavia,” says Barmenia’s CIO. He hastens to add, however, that those opportunities are becoming fewer owing in part to the huge number of institutions wanting to invest in the space.