ESG integration means investing with respect to the environmental, social and governance characteristics of underlying securities. This involves ensuring that ESG data is incorporated within the investment process through awareness on ESG theory and topics, relevant training, monitoring, and governance in respect of ESG portfolio scores. This is an economic approach dependent on valuation, the aim of such integration is to supplement and enhance the more traditional analysis and financial metrics such as price/earnings ratios, return on capital etc. When we are analysing companies, ESG information is readily available alongside other more traditional data.
What does ESG integration mean at Zurich?
Environment
The environmental aspect of ESG integration involves utilising information on investee companies’ carbon emissions, energy consumption and impact on biodiversity. For example, companies with more advanced approaches to climate change issues – adjusted for their valuation metrics - may be deemed favourable in terms of security selection.
Social
The social component of ESG integration relates to companies’ performance regarding respect for human rights, board diversity and approach to gender pay equality. We may need to adjust our valuations based on a companies track record. We also analyse investee companies’ exposure to controversial weapons and compliance with UN Global Compact Principles.
Governance
Governance involves investee companies possessing adequate measures in place in terms of corruption, bribery matters, reporting and adherence to regulations. Our preference is for companies with equal voting rights. We hold our assets in developed markets which have robust legal and regulatory systems to which the companies we invest in are subject.
What it is
Another valuable input to security selection
An economic approach dependent on valuation
What it isn't
A guarantee of superior returns
A prohibition on low ESG-rated stocks
ESG training and information
Training
Zurich Life puts a strong emphasis on training and education throughout the organisation, and training in the field of Responsible Investment is no exception. All our in-house portfolio managers as well as the in-house analysts in our portfolio management teams must undertake mandatory Responsible Investment training.
Access to information
Zurich Life sources ESG data from Morgan Stanley Capital International (MSCI), a third-party specialist data vendor, which we appointed as our ESG data provider in 2013. All of our in-house portfolio managers have access to ESG data on MSCI’s ‘ESG Manager’ online platform.
When Zurich Life engages with companies, we discuss financial and non-financial topics with them including ESG factors. We also vote fully on shareholder resolutions based on a locally approved policy with recommendations from Glass Lewis, our proxy voting advisor, albeit that we are not bound to follow their recommendations. Through the exercise of voting rights and engagement with investee companies investors can maximise investment value while addressing material ESG factors.
Your questions answered
ESG integration is an approach in which information on environmental, social and governance performance is used systematically as an integral part of the process to select securities or assets for actively managed portfolios. ESG integration is an approach that is focused on those ESG factors that are deemed economically material, i.e. deemed to impact the risk and returns associated with the assets in which we invest. ESG factors impact the bottom line: integrating them into the investment process will support us in delivering better risk-adjusted returns in the long run. ESG integration helps us to ‘do well’
The Group believes that successful ESG integration is based on four core requirements:
- Training: the investment implications of ESG factors can be very complex and traditionally finance education does not prepare finance professionals to identify and evaluate material ESG factors.
- Information: access to relevant ESG data, analysis and research is necessary for well informed decision making.
- Process: In the absence of standard tools and methods ESG needs to be reflected formally in the investment process to ensure ESG factors are reflected in investment decisions.
- Active Ownership: Through the execution of proxy votes and engagement with investee companies investors can maximise investment value after the investment decision while addressing material ESG factors.