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Swiss Re makes $130bn move to ESG benchmarks and urges peers to follow suit

Investor makes “most meaningful and strategic step in our journey”

Swiss Re has replaced all its benchmarks with ESG versions, and has called on the wider investment community to follow suit in a bid to “make the world more resilient”.
The insurance giant has already switched its actively-managed listed equities and corporate bond portfolios to ESG benchmarks, and plans to move the rest of its $130bn portfolio over by the end of the year. As a result, any benchmark-eligible investment needs to have a minimum ESG rating. 
In a report published alongside the announcement, Swiss RE said it had made the decision because traditional, market-cap based benchmarks do not tend to account for ESG and this “results in neglecting long-term sustainability risks, as they are not yet fully reflected in current market valuations but might materialise in the future.” It added that it wanted to makes its portfolio “more resilient against financial market shocks”.
The indices it has selected are both market-cap based. MSCI’s ESG Leaders Index, which was until last month called the Sustainability Index, is being used for equities. It was launched in 2007 and is also used by AMF, Ilmarinen, Fidelity and GPIF. The Bloomberg Barclays MSCI US Intermediate Corporate Sustainability BB+ Index will be used for corporate bonds. It was launched in 2014 and requires a minimum ESG score for issuers, based on a ratings system.
This is the second win this week for MSCI, who was named as one of two providers chosen by GPIF to provide indices for its $8.8bn move to ESG.
Swiss Re said its approach “creates the right incentives for portfolio managers to build a culture of long-term and sustainable thinking”.
Based on in-house research, the report claims taking ESG into consideration in its entire investment process has resulted in a better risk-return profile for corporate credit and, “to a lesser extent”, equities.
The move is part of a three-pronged approach to ESG investment taken by Swiss Re. As well as changing benchmarks, it also focuses on thematic investment such as green bond and renewables mandates, and exclusions including thermal coal.The firm described the benchmarking shift as “the most meaningful and strategic step in our journey”.
The report also highlights other barriers to wider integration of ESG into investment decision-making, including a lack of clear definitions, standards and methodologies; the low importance given to ESG within financial analysis; a focus on short-termism in financial markets; a lack of best practice on managing climate risk; lack of consistent disclosure from companies on ESG; and not enough suitable investment products.
On the subject of investment products, Swiss Re says traditional benchmarks are a hindrance because they do not account for ESG approaches in their selection. “Moreover, benchmarks that do include ESG considerations are often skewed towards a very specific theme, such as carbon footprint reduction… Benchmarks that do consider ESG factors in a broader way often represent a reduced investment universe that may seem too restrictive for many institutional investors.” The methodology being used by Swiss Re results in a reduction of the investment universe against its parent index by about 50% for equities and 75% for corporate credit.
As well as more benchmarks, it also calls for the development of more ESG screening tools, investment products such as ESG-aware ETFs, and ESG-rating methodologies.
“We call on the private and public sector to work together for more harmonisation in oversight, definitions, rules and guidelines in the ESG area,” said Group Chief Investment Officer, Guido Furer. “Imagine the impact we can have if long-term investors succeed in fully integrating environmental, social and governance considerations into our combined $75trn in institutional assets… We have a unique opportunity to make the world more resilient”. Swiss Re added that it was continuing “to explore options into its investment portfolio and adjust benchmarks for other, more specialised asset classes”.