German insurance association GDV has taken the novel move of recommending voluntary integration of ESG (environment, social and governance) criteria to its members, stating that such integration is not at odds with the pursuit of risk-adjusted returns.
The recommendation was made in a new GDV paper circulated among the association’s members that also provides guidelines for integrating ESG criteria into the investment process.
The paper marks the first time the association, which represents 460 insurers with €1.43trn in assets, has ever given its view on sustainable investing. Responsible Investor understands that the paper was compiled by a special work group consisting of representatives from 10 German insurers. Among the insurers were Allianz and Munich Re, two of Germany’s biggest and signatories to the Principles for Responsible Investment (PRI).
In the paper, the GDV says its members should consider voluntary ESG integration because it helps them mitigate investment risk. This is especially important in an industry that offers plans that are similar in the way they invest (i.e. heavy reliance on fixed income). “Hence, those that, for example, avoid reputational risk will be well-regarded,” says the GDV, adding that while it takes a long time for a company to build trust among clients, that trust can disappear almost immediately in an era of “fast and inter-connected media.”
As sustainable investing can involve exclusion – for example of controversial weapons like cluster bombs – the GDV acknowledges that the investment universe may shrink. “This can be problematic for an industry, which, given a low-interest environment, does not have many investment options,” writes the GDV. To resolve this, the association suggests that each member decide for itself whether to exclude and then what to exclude.Beyond exclusion, the GDV cites other options in integrating ESG, including enforcing “positive criteria” for companies or relying on a “best-in-class” strategy, which over- and under-weights companies based on performance on ESG issues. The lobby group further recommends voting at firms’ annual meetings as well as engagement as means to get corporates to improve their ESG performance.
“To sum up: While there is no evidence that ESG integration boosts returns, there is also no evidence that it depresses them. We believe therefore that the pursuit of risk-adjusted returns does not conflict with the respect of ESG standards,” the GDV says.
The GDV also states that it is difficult to do ESG integration when investing passively, as ESG factors play no role among the benchmark indices offering the most liquidity. It says: “Regarding financial products based on big indices, including exchange traded funds or index derivatives, integrating ESG criteria is neither possible nor practical.” As a result, products offering active management (i.e. funds) are the best alternative for GDV members wanting to do ESG integration.
However, Axel Hesse, a sustainable investment consultant, says he’s written to the GDV to correct its claim that ESG integration is incompatible with investing in the benchmark indices. “The fact is that my company, along with several leading German insurers, have developed the iSTOXX SD-KPIndex family of indices which take ESG criteria into account,“ said Hesse, who is the founder and CEO of the Hanover-based consultancy SD-M GmbH.
“They do this by overweighting or underweighting constituents of the EuroStoxx 50, Stoxx Europe 50 and Stoxx Europe 600 according to their ESG performance.”