RI Interview: Cecilia Reyes, CIO, Zurich: the risk, return and future of green/social bonds

As the Swiss insurer’s $2bn green bonds programme progresses, the CIO who kicked it off moves to a group risk role.

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Cecilia Reyes, Chief Investment Officer at Zurich, the Swiss insurer, knows about investment return. And she knows about risk. She trades one for the other when she becomes Zurich’s group Chief Risk Officer from July 1, succeeding Axel Lehmann. So it is a good time to talk to her about the investment backing Zurich has shown for green bonds – it pledged to invest up to $2bn under Reyes’ oversight – as well as the potential hurdles for the development of the green bonds market more broadly as she moves to the new role, where she will no longer directly oversee the green bonds programme.
Looking back, Reyes notes that she had been thinking about responsible investment from her early days as CIO (she took on the role in April 2010). She decided to instil RI as a core responsibility within the group’s economic thinking on asset/liability, risk and balance sheet issues. But she says her mission was also to “go beyond financial returns” for the company’s stakeholders and shareholders.
Putting some content against the high-level statement, she says this translates into three pillars. The first is the embedding of ESG factors – and not just those that are ‘financially’ material – into both internal and external asset management.
The second is gauging the insurer’s direct, positive impact in society and communities. The green bonds programme, she notes, fitted into the latter in its genesis, while also complementing its investment strategies. The third is what Reyes calls ‘advancing together’ in influencing investment markets and capital via collaboration and thought leadership to make both ESG integration and impact investing mainstream.So how has that advancement gone?
Says Reyes: “I’m very pleased with the outcome so far, particularly the impetus in the development of the green bond market that I think we have been part of. The market attraction for green bonds has been the same risk/return profiles and terms as regular corporate and supranational issuance. There’s been lots of buying competition from other investors, which is a good thing.” The Zurich green bonds programme is currently at $750m invested including euro, Swiss franc and sterling tranches, of a committed $2bn, a large portion of which has been invested via a $1bn mandate with BlackRock to select green bonds issued by the World Bank and other development institutions.

“It is enough at the moment, that the money is being dedicated to green projects for positive impact: we can worry about the details as we go.”

However, Reyes believes the market could go faster in terms of issuance, which she says has been a hurdle to allocating the capital more quickly. She also notes the need for greater integrity on the use of proceeds, the transparency of projects, and investment and impact reporting, as others: “All this is not as straightforward as one would like it to be.”
She concedes though that getting the right methodology is difficult, as are common standards on levels of carbon and GHG emissions reductions and their relation to an agreed baseline. However, she remains positive: “It is enough at the moment, that the money is being dedicated to green projects for positive impact: we can worry about the details as we go.”
As for issuers, she notes that there is a wide range and investors have to be careful with what they buy, as they always should. But she points to major indicator improvements in the market such as the work being done by supranationals on metrics such as measuring CO2 per kilowatt hour generated to assess real carbon reduction in green bond financed projects. She notes the similarities to the work that Zurich does in real estate, where it is a large investor, notably in Switzerland, and works to very specific environmental targets such as CO2 intensity per m2, and reduction targets of 20% versus a 2010 baseline and then 80% by 2050. Another plus, she says, is the alignment of discussions on quality oversight between the Green Bonds Principles and the Climate Bonds Initiative. On the pipeline of green bond issuance, she is also optimistic: “We can see increased interest from agencies, municipalities, states and corporations based on strong demand from long-term investors that are highly engaged on the topic.”
Closer to home, however, Reyes says Swiss interest in green bonds has been patchy, with little issuance to date and some market scepticism. Reyes hopes that the long-term environmentalist nature of the Swiss will see that change.
As an insurer, she notes that Zurich is potentially very impacted by climate change in areas such as natural catastrophe and weather related risks, which is why global resilience is a very important theme for it. In private equity, the insurer has been investing in clean tech projects.But green is not the only colour of its positive impact programme. It also does social impact via a micro insurance and microfinance fund with LeapFrog Investments, which aims to invest in growth companies in Africa and Asia. The microinsurance programme includes investment into a life insurer in South Africa that gives policy protection to HIV sufferers and reaches 20 million underserved people in emerging markets for insurance such as credit protection, etc. The insurer is also investing in social impact bonds based on simple payments to projects and a return income, rather than the pay-for-performance of the Peterborough social bond-type programmes.

In addition, Zurich is working with an international development NGO and a donor government on a programme of Development Impact Bonds, part of a small but growing band of large banks and insurers that are doing so. Reyes declines to name the NGO or the government because she says the insurer wants to ensure that the project is well executed before it goes public with any details. However, she says it is an international NGO in the field of health services and a large government donor. Zurich will bring the finance, the NGO will look after execution and the government will back the income stream based on its impact. The Swiss insurer is moving carefully but purposefully with environmental and impact bonds. Its $2bn green bond pipeline does not have a deadline, says Reyes: “It will be dictated by the pace of issuance, the quality of product and the fit with our overall investment portfolio. We are a long-term investor, we have the time to get it right.”

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